# Improving Transparency Into Pharmacy Benefit Manager Fee Disclosure

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2026-01907

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** January 30, 2026
- **Citation:** 91 FR 4348

## Text

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:

Proposed rule.

SUMMARY:

The Department is proposing a regulation that would require providers of pharmacy benefit management services and affiliated providers of brokerage and consulting services to disclose information about their compensation to fiduciaries of self-insured group health plans subject to the Employee Retirement Income Security Act (ERISA). These disclosures are needed so that fiduciaries can assess the reasonableness of the contracts or arrangements with these service providers, including the reasonableness of the service providers' compensation. These disclosure requirements would apply for purposes of ERISA's statutory prohibited transaction exemption for services arrangements. This proposal implements section 12 of President Trump's Executive Order 14273,
Lowering Drug Prices by Once Again Putting Americans First,
which instructs the Department to propose regulations to improve employer health plan transparency into the direct and indirect compensation received by pharmacy benefit managers. If finalized, this regulation would affect sponsors and other fiduciaries of self-insured group health plans and certain service providers to such plans.

DATES:

Comments are due on or before March 31, 2026.

ADDRESSES:

You may submit comments, identified by RIN 1210-AB37, by one of the following methods:

•
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.

•
Mail or personal delivery:
Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210.

Instructions:
All submissions received must include the agency name and Regulation Identifier Number (RIN) for this rulemaking. Comments received, including any personal information provided, will be posted without change to
http://www.regulations.gov
and
http://www.dol.gov/ebsa,
and made available for public inspection at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, 200 Constitution Avenue NW, Washington, DC 20210. Persons submitting comments electronically are encouraged not to submit paper copies.

We encourage commenters to include supporting facts, research, and evidence in their comments. When doing so, commenters are encouraged to provide citations to the published materials referenced, including active hyperlinks. Likewise, commenters who reference materials which have not been published are encouraged to upload relevant data collection instruments, data sets, and detailed findings as a part of their comment. Providing such citations and documentation will assist us in analyzing the comments.

Warning:
Do not include any personally identifiable or confidential business information that you do not want publicly disclosed. Comments are public records posted on the internet as received and can be retrieved by most internet search engines.

Docket:
Go to the Federal eRulemaking Portal at
https://www.regulations.gov
for access to the rulemaking docket, including the plain-language summary of the proposed rule of not more than 100 words in length required by the Providing Accountability Through Transparency Act of 2023.

FOR FURTHER INFORMATION CONTACT:

Stephen Sklenar or Saliha Moore, Office of Regulations and Interpretations, Employee Benefits Security Administration, Department of Labor, at 202-693-8513. This is not a toll-free number.

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 (
www.dol.gov/agencies/ebsa
).

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 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 (hereinafter “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 health-care system.
2

This proposed rule responding to those directives is only one component of the Trump Administration's larger initiative to address rising health-care costs for Americans.
3

1
90 FR 16441 (April 18, 2025).

2
See Fact Sheet: President Donald J. Trump Announces Actions to Lower Prescription Drug Prices (April 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 . . .”),
https://www.whitehouse.gov/fact-sheets/2025/04/fact-sheet-president-donald-j-trump-announces-actions-to-lower-prescription-drug-prices/.

3
See
e.g.,
Department of Labor News Release,
Departments of Labor, Health and Human Services, Treasury Announce Move to Strengthen Healthcare Price Transparency, https://www.dol.gov/newsroom/releases/ebsa/ebsa20250522.

4
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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

5
A formulary is a list of drugs covered by the plan.

PBMs are described as the “middlemen” in the pharmaceutical supply chain.
4
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, establishing drug formularies,
5
and processing claims. In connection with these services, PBMs receive compensation from self-insured group health plans as well as other sources in the pharmaceutical supply chain. Self-insured group health plan sponsors and other fiduciaries who are responsible for prudently selecting and monitoring service providers (referred to herein as “responsible plan fiduciaries”) also commonly rely on brokers or consultants to help them with advice, recommendations, and referrals regarding pharmacy benefit management services.
6

The brokers or

consultants may, in some cases, be affiliated with a PBM, and they also may receive compensation from sources other than self-insured group health plans.

6
It is well established that plan sponsors as defined in ERISA section 3(16)(B)(i) often wear two hats—an employer or settlor hat and a fiduciary hat. 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.

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.
7

In addition, in 2020, Congress amended ERISA's statutory service provider exemption to add a provision addressing disclosure by brokers and consultants to group health plans' responsible plan fiduciaries.
8

7
See Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council),
PBM Compensation and Fee Disclosure
at 20 (November 2014) (“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.”),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

8
ERISA section 408(b)(2)(B), added by section 202 of Title II of Division BB of the Consolidated Appropriations Act, 2021.

The Department's proposed regulation 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 ERISA-covered self-insured group health plans can better fulfill their statutorily mandated role to determine that the service contracts or arrangements are reasonable. Under the Department's proposed regulation, these service providers would be required to provide robust disclosures to responsible plan fiduciaries of self-insured group health plans regarding their compensation for such services, including the advance disclosure of compensation they reasonably expect to receive. The proposed regulation also includes audit provisions designed to ensure that the responsible plan fiduciaries of self-insured group health plans can verify the accuracy of the disclosures. The responsible plan fiduciaries would be able to use the disclosures in their process of selecting a provider of pharmacy benefit management services, engaging an affiliated broker or consultant, monitoring these service providers' operations and compliance with contractual obligations, and also in analyzing the drivers of prescription drug costs.

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.
9

Group health plans provide healthcare benefits such as hospitalization, sickness, prescription drugs, vision, and dental. Group health plans provide these benefits by purchasing insurance or by self-funding benefits from the employer's general assets or using a funded trust.

9
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 (August 30, 2024),
https://www.dol.gov/sites/dolgov/files/EBSA/researchers/data/health-and-welfare/health-insurance-coverage-bulletin-2023.pdf.

Retail prescription drug spending in the U.S. is expected to have amounted to nearly $495 billion in 2024 and is projected to grow 7 percent in 2025, but grow more slowly from 2026 to 2033.
10

In 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) or a percentage of the drug's cost (coinsurance). 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 participants. The tiers often distinguish between generic drugs and brand-name drugs, and may have a separate tier for “specialty drugs.”
11

10
Centers for Medicare & Medicaid Services,
National Health Expenditure Projections 2024-2033, https://www.cms.gov/files/document/nhe-projections-forecast-summary.pdf.
“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.” Centers for Medicare & Medicaid Services,
National Health Expenditure Projections 2024-2033, https://www.cms.gov/files/document/nhe-projections-forecast-summary.pdf.

11
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,
https://www.fda.gov/drugs/frequently-asked-questions-popular-topics/generic-drugs-questions-answers#q1.
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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

Managing a group health plan's prescription drug coverage is exceedingly complex for a number of reasons, including, but not limited to, the vast number of drugs available on the market and the large number of drug manufacturers and pharmacies. 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.
12

12
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) (“PBM business practices and their effects remain extraordinarily opaque.”),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf;
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 65,
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(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, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf.

Due to the complexity of the pharmaceutical supply chain and the multitude of players involved, responsible plan fiduciaries of group health plans often outsource pharmacy benefit management services among other types of 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.
13

13
See National Association of Insurance Commissioners,

A Guide to Understanding

Pharmacy Benefit Manager and Associated Stakeholder Regulation

(2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf;
U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit Managers
(GAO-24-106898, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf;
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
(July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.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 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921;
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
(2021);
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf;
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
(November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

2.1. Formulary Development and Design

PBMs develop a self-insured group health plan's prescription drug formulary,
14

which is a list of drugs that the self-insured group health plan will cover, typically sorted into tiers of cost-sharing requirements.
15
Formularies generally balance access to prescription drugs with managing costs, and their development is similar across PBMs in that they follow a multi-step process involving several distinct committees.
16
For example, the Pharmacy and Therapeutics (P&T) committee is often an external body of experts who “evaluate clinical and medical literature to select the most appropriate medications for individual disease states and conditions.”
17
These committees are staffed with health-care 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.
18
Notably, this is only one of several PBM committees with influence over formulary design.
19
There are also formulary review and value assessment committees which review P&T Committee recommendations to make formulary placement decisions and trade relations groups which negotiate and approve rebate agreements with drug manufacturers.
20

14
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,
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

15
Tasmina Hydery & Vimal Reddy,
A Primer on Formulary Structures and Strategies, Journal of Managed Care & Specialty Pharmacy
(February 3, 2024),
https://www.jmcp.org/doi/10.18553/jmcp.2024.30.2.206.

16
Tasmina Hydery & Vimal Reddy,
A Primer on Formulary Structures and Strategies, Journal of Managed Care & Specialty Pharmacy
(February 3, 2024),
https://www.jmcp.org/doi/10.18553/jmcp.2024.30.2.206.

17
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 18 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf.

18
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 35 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

19
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 36 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

20
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 36, 38 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

In connection with formulary development, PBMs and their affiliates negotiate with drug manufacturers for rebates and fees on prescription drugs and other remuneration, in return for preferred formulary placement.
21

PBMs reportedly use the large number of participants across multiple self-insured group health plans to negotiate with drug manufacturers based on “covered lives,” primarily where there are competing therapeutic alternatives.
22

Rebates are paid to the PBM periodically after the prescriptions are filled and are passed through to the self-insured group health plan to the extent required by the services contract.
23

21
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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf;
U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit Managers
at 8 (GAO-24-106898, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf.
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 19 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf.

22
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),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921;
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 29 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

23
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 19 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf;
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 39 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

More recently, 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, again pursuant to contractual terms.
24

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 roles of rebate aggregators, two of which are headquartered outside of the United States.
25

24
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 21 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 83 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

25
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 24 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

2.2. Drug Utilization Management

PBMs also provide drug utilization management services, which help optimize medication use, improve clinical outcomes, and control drug costs.
26

For example, PBMs perform utilization management services by

which they determine specific drugs that require prior authorization, under which prescribers must receive pre-approval from the PBM before a particular drug can be prescribed to the patient. Another utilization management technique is step therapy, under which a PBM determines that patients must first try and fail a particular drug or drugs, typically a lower cost or preferred drug, before moving to a different drug. Another is quantity limits on the doses provided to patients in a year. Other drug utilization management services PBMs provide include:

26
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 12 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf;
U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit Managers
at 8 (GAO-24-106898, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf.

• Non-medical switching to move a patient from one drug to another for a non-clinical reason, such as lowering cost;
27

27
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 19 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf.

• Patient compliance analysis, also known as medication adherence analysis, in which a PBM reviews various data elements related to a participant's prescription drug benefit claims to determine whether (or to the extent which) a participant is indicated as conforming to the usage of a drug as prescribed;
28

28
Taiwo Opeyemi Aremu, Oluwatosin Esther Oluwole, Kehinde Oluwatosin Adeyinka &, Jon C Schommer,
Medication Adherence and Compliance: Recipe for Improving Patient Outcomes,
MDPI (August 28, 2022),
https://pubmed.ncbi.nlm.nih.gov/36136839/.

• Therapeutic intervention, or therapeutic interchange intervention, is the substitution of a prescribed drug for another drug that is essentially equivalent in terms of efficacy, safety, and outcomes;
29

and,

29
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 17 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

• Generic substitution, which is the practice of substituting a prescribed brand name drug for a therapeutically equivalent generic alternative to reduce cost.
30

30
William H Shrank, Michael E. Porter, Sachin H. Jain, & Niteesh K. Choudhry,
A Blueprint for Pharmacy Benefit Managers to Increase Value,
Am J Manag Care (February 2009),
https://pmc.ncbi.nlm.nih.gov/articles/PMC2737824/.

2.3.
Pharmacy Networks

PBMs also develop pharmacy networks for self-insured group health plans which can be divided into three categories: retail, mail-order, and specialty.
31

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.
32

Mail order pharmacies dispense and deliver prescriptions directly to participants and are often utilized for prescription drugs that are taken regularly.
33

Specialty drugs that meet certain characteristics such as special handling needs or high cost may be provided through a separate pharmacy.
34

As noted by the Federal Trade Commission (FTC), Congress, and others, the largest PBMs are vertically integrated with retail, specialty, and mail-order pharmacies.
35

31
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 11 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf;
U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit Managers
at 8 (GAO-24-106898, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf;
.

32
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 17 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

33
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 17 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

34
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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

35
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 15-18 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf;
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 31 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

In developing a pharmacy network, PBMs negotiate dispensing fees and reimburse pharmacies for the cost of a prescription drug.
36

PBMs will establish maximum allowable cost (MAC) lists that state the greatest amount that a self-insured group health plan will pay for generics and, in some cases, brand name drugs with generic equivalents.
37

As in their negotiations with drug manufacturers, PBMs negotiate with pharmacies based on volume expected from the participants of multiple plan sponsors.
38

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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.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 26 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921
.

37
U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit Managers
at 13 (GAO-24-106898, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf
.

38
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),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921
.

2.4. Claims Administration and Other Services

Finally, PBMs also perform prescription drug claims administration services, which like the others, is key 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.”
39

PBMs have developed systems to transmit prescription information between themselves and pharmacies, permitting the rapid processing of claims as prescriptions are being filled.
40

Other services include adjudicating appeals, plan recordkeeping and regulatory compliance.
41

39
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 9 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

40
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 13 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.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 11 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

41
U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit Managers
at 8 (GAO-24-106898, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf;
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 6 (November 2014)
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

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 third-party administrator (TPA) or other entity (examples discussed herein) that agrees to provide pharmacy benefit management services to the self-insured group health plan.
42

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.
43

42
See Matthew Fiedler, Loren Adler, & Richard G. Frank,
A Brief Look at Current Debates about Pharmacy Benefit Managers,
The Brookings Institution (2023)
https://www.brookings.edu/articles/a-brief-look-at-current-debates-about-pharmacy-benefit-managers/.

43
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 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

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. Services can include requests for proposals (RFPs), PBM oversight, and PBM audit services.
44

In some cases, the consultants and brokers receive indirect compensation (
e.g.,
compensation from the PBMs or other sources other than the self-insured group health plan) that may create a conflict of interest with respect to their self-insured group health plan customers.
45

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.
46

Consultants may have preferred relationships with certain PBMs which may impact their recommendations.
47

44
Milliman, Pharmacy Benefits Consulting,
https://www.milliman.com/en/services/pharmacy-benefits-consulting.

45
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 3 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.;
AJ Ally, Patrick Cambel, Mark Gruenhaupt, & Kristin Niakan,
Report of Pharmacy Benefit Manager Practices
at 34 (2025),
https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1.

46
Bob Herman, `It's beyond unethical': Opaque conflicts of interest permeate prescription drug benefits (June 2023),
https://www.statnews.com/2023/06/20/pbms-consulting-firms-investigation/.

47
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 21 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf
.

In addition to the complexity of the negotiations, responsible plan fiduciaries often lack a clear understanding of the contractual terms, or knowledge of how PBMs operate and how they receive compensation.
48

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.”
49

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.”
50

The contracts also address the ability of the responsible plan fiduciary to audit the PBM's compliance with the contract.
51

PBMs often limit a self-insured group health plan's audit rights, however, providing only a sample of records relating to contractual performance, requiring that the auditor be approved by the PBM, or that the audit be conducted on-site at a facility chosen by the PBM.

48
While Congress has prohibited plans and issuers from entering into contracts with health care 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, 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.

49
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 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.
Alex Johnson & Brian N. Anderson,
PBM Best Practices Series, RFP Process;
Milliman White Paper (September 2016),
https://edge.sitecorecloud.io/millimaninc5660-milliman6442-prod27d5-0001/media/Milliman/PDFs/Articles/Best-practices-PBM-RFP-process.pdf.

50
Alex Johnson & Brian N. Anderson,
PBM Best Practices Series, RFP Process;
Milliman White Paper (September 2016),
https://edge.sitecorecloud.io/millimaninc5660-milliman6442-prod27d5-0001/media/Milliman/PDFs/Articles/Best-practices-PBM-RFP-process.pdf.

51
Scott McEachern & Patrick Cambel,
PBM Contracts: Understand then Optimize;
Milliman White Paper (August 2020) (“PBMs normally define all audit rights and limitations in the PBM contract and plan sponsors must initiate the audit.”),
https://us.milliman.com/en/insight/pbm-contracts-understand-then-optimize;
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 24 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

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.
52

52
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 13 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf;
House Committee on Oversight and Accountability Staff,
The Role of Pharmacy Benefit Managers in Prescription Drug Markets
at 7 (2024),
https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.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 2 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921
.

In a pass-through pricing model, self-insured group health plans may, for example, 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.
53

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 a reduced administrative fee.
54

The PBM will instead retain the spread between the price reimbursed to the pharmacy, which might be based on

maximum allowable costs (MAC) or a different formula, and the negotiated rate with self-insured group health plans.
55

53
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 13 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.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 142-43 (October 2024),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921
.

54
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 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

55
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 13 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf;
U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit Managers
at 7-8 (GAO-24-106898, March 2024),
https://www.gao.gov/assets/gao-24-106898.pdf.

The spread pricing model presents challenges for responsible plan fiduciaries in evaluating costs because there is no 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.
56

Additionally, PBMs typically do not disclose to the responsible plan fiduciaries either the reimbursement amount paid to pharmacies or the pharmacies' acquisition costs.
57

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.
58

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.
59

56
AWP is described as “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),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf.https://content.naic.org/sites/default/files/pmbwhitepap.pdf.
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),
https://aspe.hhs.gov/sites/default/files/documents/0a464f25f0f2e987170f0a1d7ec21448/RRA328-1-Rxsupplychain.pdf.
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.

57
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.”),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf;
Eastern Research Group,
An Examination of Pharmaceutical Supply Chain Intermediary Margins in the U.S. Retail Chain
at ii (September 2024),
https://aspe.hhs.gov/sites/default/files/documents/db1adf86053b1fda8ae9efd01c10ddc8/Pharma%20Supply%20Chains%20Margins%20Report_Final_2024.09.27_Clean_508.pdf.

58
Scott McEachern & Patrick Cambel,
PBM Contracts: Understand then Optimize;
Milliman White Paper (August 2020) (“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.”);
https://us.milliman.com/en/insight/pbm-contracts-understand-then-optimize.

59
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 22 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

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.
60

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.
61

Some PBMs that offer pass-through pricing also have business models that provide customers with frequent audit opportunities and minimal limitations on access to PBM data.
62

60
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 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

61
House Committee on Oversight and Accountability Staff,
The Role of Pharmacy Benefit Managers in Prescription Drug Markets
at 26 (2024),
https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.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 142 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

62
House Committee on Oversight and Accountability Staff,
The Role of Pharmacy Benefit Managers in Prescription Drug Markets
at 26 (2024),
https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf.

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.
63

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.
64

In some ways, the vertically integrated structure can be efficient and cost-effective, but some believe it may affect price competition when participants are required to use a PBM-affiliated pharmacy for certain prescriptions.
65

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.”
66

63
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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

64
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 12 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 11 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf
.

65
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 23 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.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 18 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

66
Federal Trade Commission,
Second Interim Staff Report, Specialty Generic Drugs: A Growing Profit Center for Vertically Integrated Pharmacy Benefit Mangers
at 2 (January 2025),
https://www.ftc.gov/system/files/ftc_gov/pdf/PBM-6b-Second-Interim-Staff-Report.pdf.

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, and price protection

fees. These payments are often defined by reference to list price, which commenters allege incentivizes PBMs to choose high-list price, high-rebate drugs when creating a self-insured group health plan's formulary.

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.
67

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 strategies.
68

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.
69

67
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 19 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf.

68
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 8 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(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 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

69
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 9 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(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 (April 2025),
https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921.

To the extent rebates, fees, and other sources of remuneration are passed through to the self-insured group health plan, this can help defray the cost of the health-care benefits being provided.
70

However, some sources indicate that responsible plan fiduciaries may benefit from more transparent disclosures to ensure that rebates, fees, and other sources of remuneration are passed through as agreed to under the contract with the PBM, in part due to evolving terminology used in the contracts.
71

Some have indicated that the role of rebate aggregators adds complexity to drug pricing and transparency for disclosure of rebates owed to group health plans.
72

70
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, AJ Ally, Patrick Cambel, Mark Gruenhaupt, & Kristin Niakan,
Report of Pharmacy Benefit Manager Practices
at 40 (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.”),
https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1.

71
Joanna Shepherd,
Pharmacy Benefit Mangers, Rebates, and Drug Prices: Conflicts of Interest in the Market for Prescription Drugs,
Yale Law & Policy Review at 382 (2020) (“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.”),
https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content;
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 22 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

72
Percher,
Trends in Profitability and Compensation of PBMs & PBM Contracting Entities,
at 2 (Sep. 18, 2023).

The rebate payment structure would also benefit from more transparent disclosure for other reasons. One commonly cited concern is that PBMs may 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.
73

In addition to providing PBMs with an incentive to select higher priced drugs for the formularies, some sources indicate that rebates may be offered by drug manufacturers to PBMs to exclude competing products from the formulary.
74

Disclosure of rebates and other payments from drug manufacturers will allow self-insured group health plan responsible plan fiduciaries to evaluate the impact of these payments on the plan's formulary.

73
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 20 (2025) (“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.”),
https://content.naic.org/sites/default/files/pmbwhitepap.pdfhttps://content.naic.org/sites/default/files/pmbwhitepap.pdfhttps://content.naic.org/sites/default/files/pmbwhitepap.pdf;
House Committee on Oversight and Accountability Staff,
The Role of Pharmacy Benefit Managers in Prescription Drug Markets
at 7 (2024),
https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf;
Shepherd,
Pharmacy Benefit Mangers, Rebates, and Drug Prices: Conflicts of Interest in the Market for Prescription Drugs,
Yale Law & Policy Review at 360 (2020),
https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content;
T. Joseph Mattingly 2nd, David A Hyman, Ge Bai,
Pharmacy Benefit Managers: History, Business Practices, Economics, and Policy, https://pubmed.ncbi.nlm.nih.gov/37921745/https://pubmed.ncbi.nlm.nih.gov/37921745/.

74
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.”),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.
United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug
at 8 (2021),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

Sources also indicate that rebates and related PBM formulary practices may be related to increases in the manufacturers' drug list prices.
75

Drug manufacturers may raise list prices to accommodate rebate demands to secure preferred formulary placement to protect its market share, profits, or to recoup the costs for research and development.
76

Increases in list prices do not directly impact self-insured group health plans, as they generally pay a lower price due to rebates and other discounts negotiated by the PBMs.
77

However, increases in list

prices may be a factor for a responsible plan fiduciary assessing the overall reasonableness of the contract or arrangement. Participants in self-insured group health plans that include a deductible not only often pay the full cost of the drug up to the amount of the annual deductible, but also a portion of prescription drug costs after the deductible is satisfied, typically in the form of a copayment or coinsurance. In many self-insured group health plans, cost sharing is often based off list price, resulting in higher out-of-pocket costs for participants.
78

75
Neeraj Sood, Rocio Ribero, Martha Ryan, & Karen Van Nuys,
The Association Between Drug Rebates and List Prices
at 3, U.S.C. Schaeffer (February 2020)
https://schaeffer.usc.edu/wp-content/uploads/2024/10/SchaefferCenter_RebatesListPrices_WhitePaper-1.pdf
(“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),
https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20(FINAL%201).pdf.

76
See Joanna Shepherd,
Pharmacy Benefit Mangers, Rebates, and Drug Prices: Conflicts of Interest in the Market for Prescription Drugs,
Yale Law & Policy Review at 362 (2020),
https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content.

77
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 (November 2024) (“For 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 or rebates off the list price;” noting that “[a]s used throughout this report, the term `rebates' includes rebates, fees, and other remuneration transferred to PBMs from drug manufacturers and pharmacies.”),
https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/no-surprises-act/2024-report-to-congress-prescription-drug-spending.pdf.

78
Neeraj Sood, Rocio Ribero, Martha Ryan, & Karen Van Nuys,
The Association Between Drug Rebates and List Prices
at 5, U.S.C. Schaeffer (February 2020) (“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.”),
https://schaeffer.usc.edu/wp-content/uploads/2024/10/SchaefferCenter_RebatesListPrices_WhitePaper-1.pdf;
Joanna Shepherd,
Pharmacy Benefit Mangers, Rebates, and Drug Prices: Conflicts of Interest in the Market for Prescription Drugs,
Yale Law & Policy Review at 362-63 (2020),
https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content;
T. Joseph Mattingly 2nd, David A Hyman, & Ge Bai,
Pharmacy Benefit Managers: History, Business Practices, Economics, and Policy, https://pubmed.ncbi.nlm.nih.gov/37921745/https://pubmed.ncbi.nlm.nih.gov/37921745/.

While participants can obtain assistance with the cost of prescription drugs from drug manufacturers in the form of copay cards and coupons, which can lower cost sharing for participants, some argue this effectively bypasses formulary designs, hindering generic drug substitution and increasing overall out-of-pocket costs to participants. Some self-insured group health plans have reacted to the use of copay cards and coupons by adopting programs that address how drug manufacturer assistance will interact with the self-insured group health plan's cost sharing structure, sometimes referred to as “copay maximizer,” “copay accumulator,” or “alternative funding programs.” For example, a PBM or their affiliated entity might develop a list of specialty medications as part of an alternative funding program for exclusion from coverage under a self-insured group health plan. This has the effect of allowing the plan sponsor to drop drug coverage for participants and beneficiaries in order to access assistance intended for uninsured patients. If a participant needs the medication, he or she is then redirected to another funding source, such as a patient assistance program, outside of the self-insured group health plan. These programs reportedly may be administered by PBMs and appear to be a source of additional PBM compensation.
79

79
Michelle Long, Meghan Salaga, & Kaye Pestaina,
Copay Adjustment Programs: What Are They and What do They Mean for Consumers
(October 24, 2024),
https://www.kff.org/report-section/copay-adjustment-programs-what-are-they-and-what-do-they-mean-for-consumers-issue-brief/;
David Choi, Autumn D. Zuckerman, Svetlana Gerzenshtein, Katherine V. Katsivalis, Patrick J. Nichols, Marci C. Saknini, Megan P. Schneider, Paige Taylor, & Stacie B. Dusetzina,
A Primer on Copay Accumulators, Copay Maximizers, and Alternative Funding Programs
(August 1, 2024),
https://www.jmcp.org/doi/10.18553/jmcp.2024.30.8.883.

3.3. Payments From Pharmacies

PBMs receive payments from pharmacies in a number of 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.
80

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).
81

80
National Association of Insurance Commissioners,
A Guide to Understanding Pharmacy Benefit Manager and Associated Stakeholder Regulation
at 21 (2025),
https://content.naic.org/sites/default/files/pmbwhitepap.pdf.
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 23 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

81
Some self-funded 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.

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.”
82

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.
83

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.
84

In addition to generic 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.
85

82
AJ Ally, Patrick Cambel, Mark Gruenhaupt, & Kristin Niakan,
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.”),
https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1.
Federal Trade Commission,
Interim Staff Report, Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies
at 11 (July 2024),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

83
Andrew W. Mulcahy & Vishnupriya Kareddy,
Prescription Drug Supply Chains: An Overview of Stakeholder Relationships,
RAND Corporation at 19 (2021),
https://aspe.hhs.gov/sites/default/files/documents/0a464f25f0f2e987170f0a1d7ec21448/RRA328-1-Rxsupplychain.pdf.

84
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),
https://www.finance.senate.gov/imo/media/doc/Jonathan%20Levitt%20Testimony%20US%20Senate%20Committee%20on%20Finance%20-%20Frier%20Levitt%20-%20March%202023_Redacted1.pdf.

85
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?,
https://www.alliantrx.com/wp-content/uploads/2020/05/GER-Explainer-Document.pdf
(June 24, 2025).

C. Service Provider Arrangements Under ERISA

1. Prohibited Transaction Framework

Responsible plan fiduciaries of self-insured group health plans must determine that service provider relationships involving the self-insured 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 self-insured 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 self-insured group health plan is defined by ERISA to be a “party in interest” to the self-insured group health plan.

ERISA section 408(b)(2) exempts certain arrangements between ERISA-covered plans (including self-insured group health plans) and service providers that otherwise would be 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.
86

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.
87

86
29 CFR 2550.408b-2(b), (c), (d).

87
29 CFR 2550.408b-2(e).

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.
88

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 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 1 of ERISA. The amended regulation also carries over a provision from the initial regulation regarding termination of the contract or arrangement.
89

88
Reasonable Contract or Arrangement Under Section 408(b)(2)—Fee Disclosure; Final Rule, 77 FR 5632 (Feb. 3, 2012).

89
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.”).

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.
90

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.
91

90
29 CFR 2550.408b-2(c)(1)(viii)(E).

91
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.”)

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.
92

92
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
https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB37.

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.”
93

93
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 3-4 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

The report included several findings related to this recommendation, including:

• “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.”

• “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 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.”

• “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.”

• “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.”

• “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.
94

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.”
95

94
The council noted this audit should not be confused with the requirement under ERISA section 103(3)(A).

95
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 5 (November 2014),
https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf.

Findings related to this recommendation included identification of the following problem areas, among others:

• “The exclusion of auditors who the PBM believes hold hostile views.”

• “On-site audits are required at PBM headquarters.”

• “PBMs limit the auditor to transcribing notes of documents.”

• “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.”

• “PBMs will not disclose documents requested by some auditors such as PBM contracts with retail pharmacies and drug manufacturers.”

• “Access to claims data is restricted.”

• “Audit rights restricted to limited periods (such as 2 years).”

• “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.
96

As part of the amendment, Congress designated the pre-existing text as ERISA section 408(b)(2)(A).
97

The requirements in ERISA section 408(b)(2)(B) apply 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.
98

96
Section 202 of Title II of Division BB of the Consolidated Appropriations Act, 2021.

97
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.”

98
Specifically, see ERISA section 408(b)(2)(B)(ii)(I)(bb)(AA) (defining 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”) and ERISA sections 408(b)(2)(B)(ii)(I)(bb)(BB) defining 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.)”

The new 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 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 new provision 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).
99

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.

99
Field Assistance Bulletin No. 2021-03,
https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2021-03.

With respect to the terms “brokerage services” and “consulting” as used in ERISA section 408(b)(2)(B) to define 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.”
100

100

Id.
(emphasis added). In addition to the new 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 (January 13, 2025).

D. Description of the Proposed Regulation

1. Scope of the Proposed Regulation

1.1. General—Proposed Paragraph (a)

As discussed above in section C of this preamble, ERISA section 408(b)(2) provides an exemption for services contracts and arrangements with ERISA-covered plans, provided the contracts or arrangements are reasonable, the services are necessary for the establishment or operation of the plan, and that no more than reasonable compensation is paid. Paragraph (a) of the proposed regulation provides that for purposes of the statutory exemption under ERISA section 408(b)(2), 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 the regulation are satisfied.
101

101
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).

1.2. Covered Plan—Proposed Paragraph (b)

Paragraph (b) of the proposed regulation provides that, for purposes of the regulation, a covered plan means a group health plan as defined in ERISA section 733(a), 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 as defined in § 2590.701-2.
102

ERISA section 733(a) defines a “group health plan” as “an employee welfare benefit plan to the extent that the plan provides medical care . . . to employees or their dependents . . . directly or through insurance, reimbursement, or otherwise.” The term “group health plan” includes both insured and self-insured group health plans, and includes grandfathered health plans, as defined in section 1251(e) of the Patient Protection and Affordable Care Act. Excepted benefits, such as limited scope dental and vision plans, are also group health plans for purposes of the definition of a covered plan in this proposal.
103

However, ERISA section 733(a)(1) expressly excludes qualified small employer health reimbursement arrangements from the definition of group health plan, and therefore such arrangements would not be covered plans under the regulation.

102
29 U.S.C. 1191b.

103
See Field Assistance Bulletin No. 2021-03, Q&A 3 (“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).”),
https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2021-03.

The definition of “covered plan” in the proposal excludes fully insured group health plans, and disclosure obligations with respect to these plans are reserved for future action. Accordingly, the requirements in the proposed regulation would apply only to contracts and arrangements involving self-insured group health plans. For clarity, this preamble description of the proposed regulation uses the term “self-insured group health plan” instead of the term “covered plan.”

The Department has reserved 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-funding medical care and contracting for pharmacy benefit management services. Specifically, the Department questions whether responsible plan fiduciaries responsible for procuring fully insured health insurance policy would find the specific disclosures proposed in the regulation sufficiently useful when they are negotiating more comprehensive health insurance coverage as to justify the costs associated with the disclosures (both to the covered service provider providing the disclosures and the responsible plan fiduciary reviewing and analyzing the disclosures). It is also the Department's 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.

However, the reservation of these disclosure obligations should not be interpreted as alleviating responsible plan fiduciaries of group health plans of any other obligations under ERISA. Responsible plan fiduciaries must continue to satisfy their general fiduciary obligations under ERISA with respect to the selection and monitoring of all service providers. Further, service contracts or arrangements with these service providers must be “reasonable” and otherwise satisfy the requirements of ERISA section 408(b)(2). For covered service providers as described in ERISA section 408(b)(2)(B), this includes providing the disclosures specified in that statutory provision.

The Department seeks comments on the relevance of the disclosures in this proposed regulation to responsible plan fiduciaries of fully insured group health plans. As indicated, the proposal would not apply to fully insured group health plans, in which the prescription drug coverage is integrated as a component of the insurance coverage and the insurance coverage is subject to State law. In these circumstances, in which services are fully bundled with insurance, the proposal assumes the responsible plan fiduciary discharges its 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 assumes 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.

The proposal could have required a disclosure from the insurance company in which each premium dollar is apportioned to the various elements comprising the insurance product, including insurance and services components. Moreover, the disclosure could have further required the prescription drug coverage portion to be divided between the insurance component and the services components, with an itemization of compensation received and expected to be received with respect to each of the service components. The Department has no basis, however, to determine whether the responsible plan fiduciaries of fully insured group health plans would benefit from these or similar disclosures. The Department welcomes comments on this conclusion in general, on the two specific disclosure regimes laid out above, and on whether (and, if so, how) the responsible plan fiduciary would benefit from such disclosures.

1.3. Covered Service Providers—Proposed Paragraph (c)

Paragraph (c) of the proposed regulation defines the entities that would be covered service providers under the regulation and therefore would have disclosure and related audit obligations. The proposal identifies two types of covered service providers: (i) providers of pharmacy benefit management services (as defined in paragraph (d) of the proposal) 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.
104

In each case, to be a covered service provider, the entity must reasonably expect to receive $1,000
105

or more in compensation,

direct or indirect, in connection with providing the services.
106

104
Non-affiliated brokers and consultants remain subject to the ERISA section 408(b)(2)(B) disclosures.

105
This $1,000 threshold is consistent with the thresholds in the statute (29 U.S.C.

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)).

106
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 (29 U.S.C. 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)).

The proposal's focus on providers of pharmacy benefit management services is consistent with President Trump's Executive Order 14273,
Lowering Drug Prices by Once Again Putting Americans First,
which instructs 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 recognizes that self-funded group health plans have other service providers that are not covered by this proposal and that may not be considered providers of “brokerage services” or “consulting” for purposes of ERISA section 408(b)(2)(B). 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. Stakeholders have 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.
107

The Department seeks comment on whether, and the extent to which it could and should expand the disclosures in this proposal to cover additional service providers and if so, which service providers should be covered. Additionally, the Department seeks comment on whether the disclosures proposed herein 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.

107
See letter to The Honorable Donald J. Trump from Cynthia A. Fisher,
PatientRightsAdvocate.org
(November 25, 2025),
https://www.patientrightsadvocate.org/lettertopresidentonaffordabilityandhealthcare.

1.4. Providers of Pharmacy Benefit Management Services—Proposed Paragraph (c)(1)(i)

Paragraph (c)(1)(i) of the proposal defines, as covered service providers, service providers that enter into a contract or arrangement with a self-insured group health plan to provide pharmacy benefit management services. The proposal 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.
108

Thus, the proposed definition recognizes that the pharmacy benefit management services may be performed by the covered service provider, or they may be performed by an affiliate, agent, or subcontractor of the covered service provider. Likewise, the proposed definition recognizes that compensation in connection with the services may be received by the covered service provider or it may be received by an affiliate, agent, or subcontractor of the covered service provider.

108
The definition of pharmacy benefit management services is in paragraph (d) of the proposal, discussed in the next subsection of this preamble. The terms affiliate, agent, and subcontractor are defined in paragraph (m) of the proposal and are discussed in the following subsection of this preamble.

Under this framework, paragraph (c)(1)(i) of the proposed rule focuses on the entity that has a contract or arrangement with the self-insured group health plan to provide any pharmacy benefit management services to that self-insured group health plan—that counterparty is the covered service provider. The Department believes that the service provider directly responsible to the self-insured group health 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 the Department's service provider regulation applicable to pension plans (29 CFR 2550.408b-2(c)(1)) as well as in the new statutory provision in ERISA section 408(b)(2)(B).
109

109
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.”); 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 . . .”).

In this regard, the Department understands that responsible plan fiduciaries to self-insured group health plans may take a number of different approaches in identifying and selecting a provider of pharmacy benefit management services. The self-insured group health 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 self-insured group health plan through an affiliate, agent, or 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 self-insured group health plan will enter into a contract directly with the PBM.

On the other hand, the Department understands that TPAs may contract directly with self-insured group health plans to provide a range of health-care related services, such as creating networks of health-care 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 self-insured group health 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 proposed rule and therefore must be able to obtain information from the provider performing the pharmacy benefit management services necessary for those disclosures.

Self-insured group health 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 into level-funded arrangements that have excessive 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 self-insured group health plan to provide those services would be the covered service provider. As in the TPA example, if the entity contracting or arranging with the self-insured group health plan is not providing the services itself, it would be responsible for making the disclosures to the responsible plan fiduciary required under the proposal, 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).
110

For MEWAs that are considered single ERISA plans, the responsible plan fiduciary for the self-insured group health plan would receive the disclosures from the party that contracts with the self-insured group health 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 self-insured group health 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 self-insured group health plans to provide pharmacy benefit management services. In that case, the MEWA operator would have the responsibility to make the disclosures required by the proposed 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),
111

and therefore must obtain the necessary information from the provider (
e.g.,
as a subcontractor) performing the pharmacy benefit management services.

110
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, https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/mewa-under-erisa-a-guide-to-federal-and-state-regulation.pdf.

111
See proposed paragraph (m)(4) defining “responsible plan fiduciary.”

Self-insured group health 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 self-insured group health 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 self-insured group health 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.
112

However, if the consortium or other employer group were to contract to provide the services to the self-insured group health plan, the consortium or other group would be the covered service provider.

112
Although the Department assumes these consortiums and employer groups are not affiliates of providers of pharmacy benefit management services (and therefore would not be affiliates providing advice, recommendations and referrals for purposes of paragraph (c)(2) of the proposal), depending on the facts, the consortium or other group may be considered to be a provider of “brokerage services” or “consulting” under ERISA section 408(b)(2)(B).

Finally, a single self-insured group health plan may directly contract with more than one entity for pharmacy benefit management services as such services are defined in paragraph (d) of the proposal. In such circumstances, the self-insured group health 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 self-insured group health plan.

1.4.1. Definition of Pharmacy Benefit Management Services—Proposed Paragraph (d)

Paragraph (d) of the proposed regulation defines pharmacy benefit management services as services necessary for the management or administration of a self-insured group health plan's prescription drug benefits (including the self-insured group health plan's provision of prescription drugs through the plan's medical benefit), regardless of whether the person, business, or entity performing the service identifies itself as a `pharmacy benefit manager.' The proposed definition includes a list of examples of such services, as follows:

• 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;

• processing and payment of claims for prescription drugs;

• performing utilization review and management, including the processing of prior authorization requests for drugs, step therapy protocols, patient compliance analyses, conducting therapeutic intervention, and administering generic substitution programs;

• adjudicating appeals or grievances related to the self-insured group health plan's prescription drug benefits;

• recordkeeping related to the self-insured group health plan's prescription drug benefits; and

• in conjunction with any of these other services, performing regulatory compliance with respect to the self-insured group health 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 self-insured group health plans. The examples provided in the proposed definition are intended to describe the services expansively to ensure comprehensive disclosures are made. Consequently, the proposed 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 proposed definition.

The Department requests comments on its proposed definition of pharmacy benefit management services, including whether the description of any of the services should be altered and whether any services should be expressly added as examples.

1.4.2. Affiliates, Agents and Subcontractors—Proposed Paragraph (m)

The proposed terms “affiliate,” “agent,” and “subcontractor,” identify parties other than the covered service provider that may perform pharmacy benefit management services and also may receive compensation in connection with pharmacy benefit management services, and would be required to be disclosed under the regulation. As noted above, the regulation places the obligation on the covered service provider to make the disclosures and to seek any required information from these parties as needed for the disclosure. Proposed paragraph (c)(2) would clarify that affiliates, agents, and subcontractors of covered service providers do not, themselves, become covered service providers as a result of providing services pursuant to the contract or arrangement.
113

113
This clarifying provision is also in the Department's service provider disclosure regulation

for pension plans (29 CFR 2550.408b-2(c)(1)(iii)(D) and is in ERISA section 408(b)(2)(B)(ii)(III).

Under paragraph (m)(1) of the proposal, an affiliate is an entity that “directly or indirectly (through one or more intermediaries) controls, is controlled by, or is under common control with such person or entity; or is an officer, director, or employee of, or partner in, such person or entity.” The proposed definition states that unless otherwise specified, an “affiliate” in the regulation refers to an affiliate of the covered service provider. In other contexts, the Department has said “control” refers to the power to exercise a controlling influence over the management or policies of a person other than an individual.
114

114
See
e.g.,
29 CFR 2550.404c-1(e)(3).

Paragraph (m)(5) defines a subcontractor as a “person or entity (or an affiliate of such person or entity) that is not an affiliate of the covered service provider and that, pursuant to a contract or arrangement with the covered service provider or an affiliate, reasonably expects to receive $1,000 or more in compensation for performing one or more services described pursuant to paragraph (d) of this section provided for by the contract or arrangement” with the self-insured group health plan. Accordingly, under the proposed definition, an affiliate of a subcontractor would also be considered a subcontractor for purposes of the regulation, including the disclosure requirements.

The proposed definitions of the terms “affiliate” and “subcontractor” are consistent with the definitions of these terms in the Department's service provider disclosure regulation for pension plans (29 CFR 2550.408b-2(c)) as well as the new service provider disclosure obligations in ERISA section 408(b)(2)(B), and the Department believes they are well understood by stakeholders.
115

115
See 29 CFR 2550.408b-2(c)(1)(viii)(A) and (F); ERISA section 408(b)(2)(B)(ii)(I)(cc) and (ff).

The proposal also includes, in addition to “affiliates” and “subcontractors,” the term “agent,” defined in paragraph (m)(2) as “any person or entity authorized (whether that authorization is expressed or implied) to represent or act on behalf of another person or entity.” Unless otherwise specified, an “agent” for purposes of the regulation refers to an agent of the covered service provider. This additional proposed term is included based on the concern that, in the context of pharmacy benefit management services, entities that receive undisclosed compensation in connection with pharmacy benefit management services may not technically fall within the definition of an “affiliate” or a “subcontractor.” As one example, the Department is aware that some providers of pharmacy benefit management services have formed rebate aggregators or GPOs outside of the laws of the United States.
116

The Department intends that any compensation received by these entities in connection with pharmacy benefit management services to a self-insured group health plan would be disclosed under the regulation.

116
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),
https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf.

The Department requests comments on the proposed definitions of affiliate, agent, and subcontractor, including whether parties such as rebate aggregators or GPOs (or any other parties that fall within the proposed definition of agent) are likely to be covered by either of the other proposed definitions (
i.e.,
affiliate or subcontractor).

1.5. Affiliated Providers of Brokerage or Consulting Services—Proposed Paragraph (c)(1)(ii)

Concerns have been raised that brokers and consultants may receive payments from parties they are recommending, which may be undisclosed to their self-insured group health plan clients.
117

These arrangements have a high potential for conflicts of interest that warrant disclosure, as evidenced by Congress's amendment to ERISA section 408(b)(2) requiring disclosure of, among other things, indirect compensation reasonably expected to be received by providers of “brokerage services” and “consulting” with respect to pharmacy benefit management services.

117
Advisory Council on Employee Welfare and Pension Benefit Plans,
PBM Compensation and Fee Disclosure
at 3 (November 2014) (“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.”),
https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/about-us/erisa-advisory-council/2014-pbm-compensation-and-fee-disclosure.pdf.

To the extent that PBMs as described in paragraph (c)(1)(i) of the proposal, or their affiliates, also provide “brokerage services” or “consulting” to self-insured group health plans regarding pharmacy benefit management services, the Department has determined that special provisions under the proposal are needed. Paragraph (c)(1)(ii) of the proposed regulation therefore identifies as covered service providers those parties described in paragraph (c)(1)(i) of the proposal or their affiliates, that enter into a contract or arrangement with a self-insured group health plan to provide advice, recommendations, or referrals of pharmacy benefit management services. These covered service providers would have the obligation proposed in the regulation to disclose their compensation and to allow for an audit, as discussed below.

Although the terms “brokerage services” and “consulting” in ERISA section 408(b)(2)(B) are not defined, entities that would be covered service providers under paragraph (c)(1)(ii) of the regulation are also likely to be covered service providers under ERISA section 408(b)(2)(B). In the Department's view, the obligations under the proposal may be more specific than the statutory disclosure requirements but are not inconsistent with them. Moreover, because this proposed regulation provides specific descriptions of compensation streams and arrangements in the pharmaceutical supply chain that must be disclosed, the Department envisions that compliance with the requirements of the regulation, if adopted, would also satisfy the requirements of section 408(b)(2)(B) with respect to provision of brokerage services or consulting with respect to pharmacy benefit management services.

The Department believes that these brokers and consultants should be described as covered service providers under this regulation, rather than only under ERISA section 408(b)(2)(B), because of their affiliation with providers of pharmacy benefit management services. The conflicts associated with that affiliation should be disclosed to the self-insured group health plans' responsible plan fiduciaries. Further, if this regulation is adopted, it may be difficult as a practical matter for affiliated brokers and consultants to determine the extent of their obligations under the statutory provision given the lack of a definition of “brokerage services” and “consulting”, and ambiguity surrounding the “indirect compensation” that must be disclosed. Additionally, the Department has tailored the requirements of this proposal to the practices of pharmacy benefit management service providers and therefore to the extent that their broker and consultant affiliates receive compensation that is specifically described in the regulation, responsible plan fiduciaries may receive higher

quality disclosures from these brokers and consultants than they would receive absent such tailoring. Brokers and consultants may benefit from greater confidence in satisfying their disclosure requirements under the prohibited transaction exemption. Therefore, including these entities in the regulation would serve a compliance assistance function. On the other hand, to the extent brokers and consultants that are covered service providers have very simple compensation arrangements—
e.g.,
they only receive direct payments from the self-insured group health plan—the obligations under the regulation would be relatively minor.

The Department intends that brokers and consultants that provide advice, recommendations, or referrals regarding pharmacy benefit management services, but are not affiliates of these providers, would be able to determine their disclosure obligations under ERISA section 408(b)(2)(B), which is self-effecting.
118

With respect to these entities, the Department does not envision that its enforcement policies announced in Field Assistance Bulletin 2021-03 would change in connection with this proposal. Thus, entities that are not affiliated with providers of pharmacy benefit management services would continue to use a good faith, reasonable interpretation of ERISA section 408(b)(2)(B), including with respect to determining their status as covered services providers. The Department continues to believe 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.”
119

118
See Field Assistance Bulletin No. 2021-

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2026-01907. Public record. Not legal advice.