DOL Proposes Pharmacy Benefit Manager Fee Disclosure Rule

This is the first of several alerts that Groom Law Group expects to issue regarding the new proposed regulation issued on January 29, 2026 by the U.S. Department of Labor (“DOL”) requiring providers of pharmacy benefit management services and affiliated brokers and consultants to disclose information about their compensation to fiduciaries of self-insured group health plans. The proposed regulation, issued under Employee Retirement Income Security Act (“ERISA”) section 408(b)(2), provides an exemption for certain arrangements between self-insured group health plans and pharmacy benefit management service providers from ERISA's prohibited transaction rules that apply to service contracts or arrangements. The proposed regulation is much broader than the corresponding rule for pension and retirement plans, not only in terms of the type of compensation and fees that are subject to disclosure but also regarding the extent and timing of the written disclosure and the rights of plan fiduciaries with respect to the disclosures (e.g., audit rights). We anticipate this far-reaching proposed regulation will have a significant impact on a number of plan sponsors, service providers, and fiduciaries.

Background

On April 15, 2025, President Trump issued Executive Order 14273, Lowering Drug Prices by Once Again Putting Americans First, (the “EO”), which directed the DOL to issue regulations under ERISA section 408(8)(b)(2) with respect to PBMs as part of this Administration's efforts to try to bring down drug prices. As directed by the EO, on January 29, 2026, the DOL issued the proposed regulation. The regulation's stated purpose is to provide greater transparency into contracts and arrangements with entities providing pharmacy benefit management services (e.g., PBMs) and affiliated brokers and consultants so that plan fiduciaries can better determine whether or not their contracts or arrangements are reasonable. A specified goal of the proposed regulation, consistent with the directive of the EO, is to create a more competitive prescription drug market by promoting transparent pricing. Comments are due on the proposed regulation by March 31.

Overview of the Proposed Regulation

The proposed regulation seeks to leverage ERISA's statutory framework to compel comprehensive reporting on compensation for pharmacy benefit management services, as well as on per unit costs for covered drugs, both on a cumulative basis and at the prescription drug level for each drug covered on the plan's formulary. More specifically, ERISA section 406 generally prohibits the furnishing of services between a self-insured group health plan and a party in interest to the plan, unless an exemption applies. Under ERISA, a party in interest is defined to include a person that provides services to the group health plan. ERISA section 408(b)(2), however, exempts certain arrangements between plans and service providers that would otherwise be prohibited under ERISA section 406, so long as 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 proposed regulation would provide a regulation-based exemption from ERISA's prohibited transaction rules under ERISA section 406 where the conditions are otherwise satisfied.

I. What entities are covered by the proposed rule?

The proposed regulation provides an exemption from ERISA's prohibited transaction rules for pharmacy benefit management service providers, including affiliated brokers and consultants and self-insured group health plans that have entered into a contract or arrangement. The proposed regulation outlines which plans are covered by the regulation, as well as which entities would be considered to be a covered service provider. Of note, the proposed regulation does not cover PBMs by name but rather establishes a functional definition to determine which service providers are covered.

• Covered Plan.  The proposed regulation covers group health plans, as defined in ERISA section 733(a). The definition of a covered plan excludes fully-insured group health plans.

• Covered Service Provider. The proposed regulation covers any service provider that enters into a contract or arrangement with a covered plan and expects to receive $1,000 or more in direct or indirect compensation in connection with providing pharmacy benefit management services or providing advice, recommendations, or referrals regarding the provision of pharmacy benefit management services.

Pharmacy benefit management services under the proposed regulation is defined broadly and includes the services necessary for the management or administration of a covered plan's prescription drug benefits (including those provided through the plan's medical benefit). The proposed regulation provides a number of illustrative (but non-exhaustive) examples of pharmacy benefit management services:

• acting as a negotiator or aggregator of rebates, fees, discounts, and other price concessions for prescription drugs;
• establishing or maintaining pharmacy networks;
• processing and payment of claims for prescription drugs;
• performing utilization review and management;
• adjudicating appeals or grievances related to the plan's prescription drug benefit;
• recordkeeping related to the plan's prescription drug benefits; and
• performing regulatory compliance for the plan's prescription drug benefit, in conjunction with any of the other enumerated services.

II. What information must be disclosed?

Under the proposed regulation, service providers must make an initial disclosure reasonably in advance of the date on which the service contract or arrangement is entered, extended, or renewed. The disclosures must identify the compensation the service provider reasonably expects to receive pursuant to the contract. Service providers must also make a semiannual disclosure that provides information regarding the actual compensation received under the contract or arrangement, including an explanation where the actual compensation materially exceeds the corresponding compensation estimate.

Initial disclosure. The proposed regulation outlines the following content requirements for the initial disclosure:

1. Description of services. A description of each pharmacy benefit management service or of the advice, recommendations, or referrals regarding the pharmacy benefit management services provided to the plan pursuant to the contract or arrangement.
2. Direct compensation. A description of all direct compensation in the aggregate and by service reasonably expected to be received on a quarterly basis.
3. Manufacturer payments. A description of payments (both in the aggregate and for each prescription drug covered on the formulary) reasonably expected on a quarterly basis from the manufacturer or an aggregator. The service provider must specify amounts passed on and amounts retained.
4. Spread compensation. A description of the quarterly amount of spread compensation reasonably expected to be received by the service provider, defined as the difference between the negotiated rate reasonably expected to be paid by the plan and the negotiated rate reasonably expected to be paid by the service provider to the pharmacy for dispensing drugs (both in the aggregate and for each covered drug on the formulary).
5. Copay claw-backs. A description of the quarterly amount of copay claw-back compensation reasonably expected to be recouped from a pharmacy by a service provider, defined as a description of the dollar amount of the difference between a copayment or coinsurance amount paid to the pharmacy by a participant or beneficiary and the reimbursement to the pharmacy that is recouped by the service provider.
6. Price protection agreements. A description of any inflation protection or price protection agreements that the service provider has with any drug manufacturer or other party in connection with prescription drugs dispensed under the service contract or arrangement.
7. Compensation for termination of service contract or arrangement. A description of any compensation that the service provider reasonably expects to receive in connection with termination of the contract or arrangement.
8. Description of other compensation. Any other compensation not disclosed under the other content requirements of the initial disclosure.
9. Description of formulary placement incentives. A description of any formulary placement incentives and arrangements that the service provider has with any drug manufacturer.
10. Drug pricing methodology. A description of the net cost to the covered plan of each drug on the formulary, for each pharmacy channel, expressed as a monetary amount.
11. Statement of fiduciary status. A statement that the service provider is providing services as a fiduciary, if applicable, as well as any activity or policy that may create a conflict of interest.
12. Statement of audit right. A statement of the plan's right to conduct an audit (as outlined by the proposed regulation) and the procedures for requesting an audit.

Under the semiannual disclosure, the service provider must disclose the actual compensation received with respect to the categories of compensation disclosures made in the initial disclosure. The semiannual disclosure also requires an explanation if the actual compensation received for any category of compensation that was provided in the initial disclosure materially exceeds the estimate provided in the initial disclosure. The proposed regulation defines “materially” as five percent or more (unless a lower percentage or dollar amount is agreed upon). The semiannual disclosure must be made no later than 30 days after the end of each six-month period.

III. Other noteworthy provisions

Audit right

The proposed regulation gives self-insured plans an annual right to audit the service provider for accuracy of any disclosure made pursuant to the proposed regulation. The plan fiduciary can select their own auditor, but must pay the cost of the auditor. The service provider is responsible for the cost of providing the information requested for the audit and must provide the auditor any information that is owned or held by an affiliate, agent, or subcontractor of the service provider.

Innocent fiduciary exemption

The proposed regulation exempts from liability under the prohibited transaction rules responsible plan fiduciaries if they did not know that the service provider failed or would fail to make the disclosures and reasonably believed the regulation's requirements had been met. Once the failure is uncovered, the exemption requires the responsible plan fiduciary to make a written request to the service provider to correct the failure. If the service provider does not comply with the request in 90 days, the plan fiduciary must provide notice to the DOL of the failure. The proposed regulation does not require the plan fiduciary to terminate the contract but instead requires plan fiduciaries to determine whether they should continue the contract or arrangement.

IV. Form, manner, and applicability date

The disclosures under the proposed rule are required to be clear and concise and must contain sufficient specificity to permit evaluation of the reasonableness of the service contract or arrangement. Disclosure of compensation must be expressed as a monetary amount and may be estimated if the actual amount is not reasonably ascertainable. The proposed regulation allows plan fiduciaries to request the disclosure in a machine-readable file format.

The proposed regulation, if finalized, would apply to plan years beginning on or after July 1, 2026.

V. Conclusion

The proposed regulation is a major step in this Administration's efforts to implement rules requiring an unparalleled level of transparency into the compensation streams within the prescription drug industry. As we expect to discuss in detail in our follow-on alerts regarding the proposed regulation (and as noted above), the proposed regulation is much broader than the corresponding rule for pension and retirement plans, not only in terms of the type of compensation and fees that are subject to disclosure but also regarding the extent of the written disclosure, the timing and frequency of disclosure, the requirement to generally disclose using monetary amounts (versus formulas or percentages), and the provision of specific rights to plan fiduciaries with respect to the disclosures (e.g., audit rights). Given the significant impact the proposed regulation would have if finalized, plan sponsors, health insurance issuers, third-party administrators, and other service providers should review the proposed regulation closely and consider submitting comments to the DOL by the March 31^st deadline.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.