Jeremy Pilaar and Albert (Haotian) Wang present the weaknesses in current legislative reforms targeting pharmacy benefit managers. They suggest that lawmakers focus on reining in PBM income, limiting fees that PBMs can charge, and empowering state legislative efforts.
In an effort to lower drug costs, American policymakers have recently passed or introduced a slew of reforms targeting pharmacy benefit managers (PBMs). These are the companies that health plans rely on to administer prescription drug benefits for their members. They help determine the effective price members pay for drugs through a complex and often opaque system of rebates and fees. As such, they have come under increasing scrutiny for their role in exposing certain patients to higher drug costs.
Earlier this year, the Federal Trade Commission (FTC) settled with two of the three largest PBMs—Express Scripts (in February) and CVS Caremark (in July)—over rebating practices that allegedly inflated insulin list prices. The FTC is now weighing a proposed consent agreement with the third, Optum Rx. States from California to Tennessee have passed laws restricting how PBMs operate, and lawmakers across at least 26 states have introduced more than 120 bills regulating PBMs over just the past year.
In February, after years of false starts, Congress enacted legislation regulating aspects of PBMs’ commercial conduct as part of the 2026 Consolidated Appropriations Act (CAA). These regulations may not address the root causes of high prescription drug costs, such as the market power of drug manufacturers, but many policymakers want to push reforms further—and the desire is bipartisan. In May, Senators Elizabeth Warren (D-MA) and Josh Hawley (R-MO) reintroduced joint legislation that would bar the parent company of a PBM or an insurer from owning a pharmacy business in an effort to spur competition. In July, the House Committee on Oversight and Government Reform voted 40-2 to advance a bill that would set minimum amounts that PBMs have to pay pharmacies for medication, require rebates from manufacturers to be passed through to customers at the point of sale, and prohibit PBMs from steering enrollees to affiliated pharmacies under the Federal Employees Health Benefits Program.
In the near term, any further broad-based PBM reform will likely need to come from Congress. The Employee Retirement Income Security Act of 1974 (ERISA) preempts many state laws that “relate to” employee benefits, leaving unresolved how far states may go in regulating PBMs that administer employer-sponsored health plans. PBMs and their trade organizations have filed numerous lawsuits in the past several years challenging state PBM laws on ERISA preemption grounds, creating legal uncertainty for reform efforts in California, Oklahoma, and elsewhere.
As federal lawmakers consider additional PBM legislation, it is critical to understand key areas the CAA left unaddressed. This article summarizes the CAA’s PBM provisions and highlights three further steps Congress could take to help produce the savings the law was meant to deliver: (1) reining in PBM income from specialty pharmacies; (2) limiting PBM fees in the commercial insurance market; and (3) amending ERISA to empower states to pursue additional reforms as the sector evolves.
What the CAA does (and does not) do
The CAA increases transparency in PBM payment flows, mandates new federal analyses of PBM compensation, and limits certain PBM income streams, like charging fees above fair market value in connection with drugs covered by Medicare Part D. Some of these changes are significant: regulators will be able to use the new disclosures PBMs are required to furnish to uncover PBM business practices that may be harming consumers, support investigations, and, where warranted, launch enforcement actions. Moreover, for Medicare Part D plans, the law requires the Centers for Medicare & Medicaid Services (CMS) to define through rulemaking what constitutes a “fair market value” fee for PBM services.
Exhibit. Key Reforms to Pharmacy Benefit Managers in the Consolidated Appropriations Act, 2026
| Reform | Summary | Objective |
| “Bona Fide Service Fees” in Medicare Part D | Starting in 2028, PBMs and their affiliates generally may not derive remuneration connected with covered Part D drugs other than flat-dollar, fair-market-value “bona fide service fees” (which include certain flat-dollar, fair-market-value incentive payments). | Disincentivize PBMs from charging health plans more for generic drugs than they reimburse pharmacies (“spread pricing”) or favoring expensive brand-name drugs on formularies to maximize rebates (which are often calculated as a percentage off a drug’s list price). |
| 100% Rebate Pass-Through | Starting in 2028, PBMs and their affiliates must fully pass through manufacturer rebates, discounts, and other price concessions on covered Medicare Part D drugs to Part D plan sponsors. Similarly, for plan years beginning at least 30 months after enactment (January 1, 2029, for calendar-year plans), new, renewed, or extended PBM contracts for ERISA-covered group health plans must require the PBM to remit to the plan 100% of rebates, fees, alternative discounts, and other remuneration related to drug utilization or spending, excluding “bona fide service fees,” which the statute does not specifically define for the commercial market. | Lower costs for health plans (and ideally their members) by ensuring that all manufacturer discounts are passed through to plans and disincentivizing PBMs from privileging high-priced, brand-name drugs on formularies to increase rebate amounts for their own retention. However, the bona fide service fee exclusion leaves room for PBMs to recharacterize retained remuneration as compensation for services. |
| Increased Transparency Through Data Reporting | PBMs must provide annual reports to Medicare Part D plan sponsors and CMS beginning in 2028. For most group health plans, new, renewed, or extended PBM contracts must require semi-annual, machine-readable reports for plan years beginning at least 30 months after enactment. Additional drug-level reporting applies to specified large plans and employers; fully insured large groups may elect annually to receive it. | Give health plans and the federal government more visibility into PBM compensation flows to help identify business practices that may raise drug prices or reduce savings for health plans and their members; increase Medicare Part D plan sponsors’ and employer-based health plans’ power to bargain for additional price concessions in contract negotiations with PBMs. |
| More Pharmacy Choice Under Medicare | The CAA strengthens existing federal law requiring that any pharmacy willing to accept a Medicare Part D plan sponsor’s standard contract terms and conditions be able to participate in its pharmacy network. | Prevent PBMs from excluding community pharmacies from their networks — ideally giving Part D enrollees more options of where to fill prescriptions, as well as increasing competition with PBM-affiliated pharmacies. |
| Federal Agency Review of PBM Compensation | GAO must study price-related compensation structures and potential conflicts of interest in the Medicare Part D retail prescription-drug supply chain. MedPAC must report to Congress on PBM agreements with Part D and MA–PD plans. CMS may review selected components of PBM remuneration arrangements, in consultation with OIG, as CMS deems appropriate. | Provide regulators with additional data and analyses on PBM activities that may lead to increased prescription drug prices; establish a baseline for future enforcement actions. |
Source: Authors’ own analysis of Consolidated Appropriations Act, 2026, H.R. 7148, PL 119-75, 119th Cong., 2nd Sess. §§ 6223, 6224, 6701, 6702 (2026).
Abbreviations: CMS, Centers for Medicare & Medicaid Services; GAO, Government Accountability Office; MedPAC, Medicare Payment Advisory Commission; OIG, U.S. Department of Health and Human Services, Office of Inspector General; MA–PD, Medicare Advantage Prescription Drug.
By contrast, one of the main mechanisms designed to control prescription drug costs—the requirement that PBMs pass through 100% of manufacturer rebates and discounts to plan sponsors or insurers—may have less of an impact than reformers hoped. This requirement responds to long-standing concerns that PBMs have retained a disproportionate share of the rebate dollars they receive, with some observers contending that this money could have been passed on to health plans and their members. Yet PBMs have been moving away from rebates as a source of income. PBMs increased the share of rebates passed through to commercial health plans from 78% to 91% between 2012 and 2016 (the latest period for which reliable data are available), and PBMs already pass through more than 99% of rebates to Medicare Part D plan sponsors. Correspondingly, a 2023 analyst report suggests that commercial rebate retention fell from 46% of the total share of estimated gross PBM profits in 2012 to 13% in 2023. This component of the CAA may thus have a limited effect in unlocking additional savings for health plans or consumers.
The growth of specialty pharmacy income
The changing rebate landscape underscores that PBM revenue models are adaptable. Any further legislation aimed at lowering consumers’ prescription drug costs must therefore contend with shifts in PBMs’ business practices. One of those is the growth in income from specialty pharmacies, which dispense medications characterized by high costs and needs for special handling or administration. Specialty pharmacy income rose from 16% of the total share of estimated gross PBM profits in 2012 to a projected 39% in 2023.
Concentration and vertical integration are important reasons why. The PBM market is dominated by three firms—CVS Caremark, Express Scripts, and OptumRx—which collectively manage around 80% of pharmacy prescriptions in the United States and are part of vertically integrated conglomerates that also own pharmacies and insurers. The major PBMs’ market position and vertical integration have allowed them to exclude unaffiliated specialty pharmacies from their networks, steer health plan members to affiliated pharmacies, and reimburse affiliated pharmacies for specialty drugs at rates substantially above estimated acquisition costs. This may help explain why PBM-affiliated pharmacies captured nearly $7 out of every $10 in specialty drug dispensing revenue in 2023 and generated $7.3 billion of excess dispensing revenue on a set of specialty generic drugs over a recent five-year period. Such marked-up rates can raise spending by insurers over time—resulting in higher premiums—and increase patient cost sharing when out-of-pocket obligations are tied to point-of-sale prices.
The CAA targets these practices only partially. When it comes to employer-sponsored coverage, PBMs must disclose benefit designs that route patients to affiliated pharmacies, but the law does not restrict the routing—even though this segment likely accounts for much of the excess dispensing revenue PBM-affiliated pharmacies earn on specialty generics. The law goes further for Medicare Part D, requiring “reasonable and relevant” network contract terms and new disclosure of affiliate relationships and pharmacy incentive payments, yet these rules set no ceiling on what a PBM may pay its own pharmacy. And while the law limits PBM and affiliate remuneration on Part D drugs to flat, fair-market-value service fees, it expressly preserves existing pharmacy reimbursement rules, leaving PBMs free to keep paying their affiliates marked-up rates on specialty generics.
Congress could take steps to fill these gaps. It could pass legislation prohibiting PBMs from steering patients to their affiliated pharmacies, confining the rates at which PBMs can reimburse affiliated pharmacies for specialty drugs, setting limits on what PBMs can define as a specialty drug to begin with, or some combination of these reforms. Congress could also go further by prohibiting PBMs from owning pharmacies altogether, as proposed in the Warren-Hawley bill.
Multiplying fees
While establishing a “fair-market-value” standard for PBMs may limit fees related to Medicare Part D-covered drugs, it will not address the growing income from fees in the commercial insurance market. Analyst data suggest that the share of estimated gross PBM profits derived from fees more than quadrupled in recent years, from 5% in 2012 to a projected 22% in 2023. During this period, adjusted operating profits and net income of the major PBMs’ parent companies continued to grow significantly even as rebates waned in importance.
This trend may keep list prices high and limit prescription drug affordability for patients whose cost sharing is tied to those prices. For example, PBMs charge manufacturers a number of administrative, vendor, and other fees. Many of these fees are not flat-dollar amounts but instead are calculated as a percentage of list prices at the same time as negotiations for placing the manufacturer’s drugs on a PBM’s “formulary” list of drugs covered by insurance, leading two-thirds of manufacturers surveyed in 2023 to label such fees as a barrier to decreasing list prices.
It is difficult to track which fees PBMs are charging and whether they may be inflated. As a recent white paper by the University of Southern California Schaeffer Center underscores, vertical integration allows PBMs to make accounting choices that obscure the link between individual income sources and aggregate revenue and expense figures. Further complicating the picture, over the past few years, PBMs have created their own “group purchasing organizations” (GPOs) in foreign countries with minimal financial transparency to centralize negotiations with pharmaceutical manufacturers over fees and rebates (collecting new GPO administrative fees in the process).
While the CAA’s financial transparency requirements may shed light on PBM fee arrangements for commercial plans, the law does not give policymakers sufficient tools to rein in unjustified charges. The CAA requires PBMs to pass through to health plans 100% of rebates, fees, and other remuneration they receive from manufacturers and other upstream entities related to drug utilization or drug spending under the plan. But it does not require PBMs to remit “bona fide service fees,” and does not provide a specific definition of that term in the commercial context. This leaves room for PBMs to characterize upstream remuneration from manufacturers as a service fee and retain the income. Service fees paid to PBMs by health plans, meanwhile, need only be “reasonable” and “transparent and quantifiable to group health plans and health insurance issuers” on top of being for bona fide services. These conditions tell a plan what it is paying but do not establish a clear benchmark for what the service is worth or limit how the fee may be structured.
Congress could reduce the risk that PBMs replace rebate dollars with fees that may increase consumer costs by prohibiting PBMs and their affiliates in the commercial market from retaining any drug-related remuneration other than flat-dollar, fair-market-value fees for services actually performed, while allowing rebates and discounts that are fully passed through to the plan. Congress could build on the approach that Section 6701 of the CAA already takes for PBM reporting by writing the new requirements into ERISA, the Public Health Service Act, and the Internal Revenue Code. The Departments of Labor, Health and Human Services, and of the Treasury could then adapt the fair-market-value methodology CMS develops under the CAA’s existing rulemaking mandate to the different service mixes and populations in the commercial market, enforcing the resulting standard in the segments each regulates.
ERISA preemption
Finally, Congress could free itself from the need to continually revisit the issue of PBM reform—something it is unlikely to be in a position to do as federal legislation becomes harder to pass—by giving states more leeway to regulate the sector. State legislatures have shown that they are up to the task of keeping up with changing PBM business practices between 2017 and 2026.
Yet, as noted earlier, ERISA creates significant uncertainty about whether states may regulate many PBM practices affecting ERISA-covered employer plans, particularly self-funded plans, ranging from unreasonable specialty-drug designations to patient steering and pharmacy-network restrictions.
Congress could soften ERISA preemption when it comes to state PBM legislation, such as by allowing states to adopt consumer protections beyond what ERISA requires, or by creating a statutory waiver for ERISA preemption that allows states the flexibility to experiment with regulatory approaches. Successful models developed at the state level could later be expanded across the country.
Conclusion
The CAA was an important first step in regulating PBM business practices that may contribute to increased prescription drug costs for consumers, but the statute left several key areas unaddressed. Congress could build on the legislation by enacting provisions that help curtail the growth of PBM income from specialty pharmacies, ensure fees are appropriately tailored to services provided, and give states greater room for regulatory experimentation as the sector evolves.
Authors’ Disclosures: Mr. Pilaar’s spouse is employed by a clinical-stage biopharmaceutical company. The views expressed are the authors’ own. You can read ProMarket’s disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
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