From modeling rebate assumptions across dozens of self-funded plan renewals, the shift from a retained-rebate to a full-passthrough regime changes net drug cost projections by 8% to 15% depending on formulary mix and therapeutic category. That is not a rounding error; it is the difference between a 6% pharmacy trend and a 14% gross trend with a transparent credit line. For years, health actuaries embedded a "net drug cost" figure that obscured how much the PBM kept versus how much reached the plan. The Consolidated Appropriations Act of 2026, signed by President Trump on February 3, 2026, eliminates that opacity. Every dollar of manufacturer rebate, fee, alternative discount, and utilization-based remuneration must now flow to the plan sponsor (Mintz, February 2026). PBM compensation is restricted to bona fide service fees that cannot be calculated as a function of drug price or volume. The legislation does not merely suggest transparency; it converts noncompliance into a prohibited transaction under ERISA Section 408(b)(2), with civil penalties of $10,000 per day for late or incomplete disclosure and $100,000 for knowingly false information under new ERISA Section 726 (Davis Wright Tremaine, February 2026).

While legal outlets covered the Consolidated Appropriations Act provisions as a compliance checklist and trade press noted the bill's passage, no publication has connected the federal mandate to its downstream actuarial impact: how full passthrough changes net cost assumptions in plan pricing models, how the NAIC examination framework layers state enforcement on top of federal ERISA penalties, and how the FTC's concurrent Express Scripts settlement establishes the structural template for delinked PBM compensation. This article maps the complete enforcement architecture and translates each provision into specific actuarial modeling adjustments.

100%
Rebates, Fees, and Remuneration Must Pass Through to Plans
$10K/day
ERISA Section 726 Penalty for PBM Nondisclosure Violations
Jan 2029
Effective Date for Calendar-Year ERISA Plan Contracts

The 100% Rebate Passthrough: What the CAA 2026 Covers

The scope of the passthrough mandate is deliberately broad. PBMs must remit to their plan clients "100% of rebates, fees, alternative discounts, and other remuneration" received from manufacturers, group purchasing organizations, rebate aggregators, and any other entity in connection with the plan's drug utilization or drug spending (Mintz, February 2026). The word "remuneration" captures categories that prior state-level transparency laws missed: volume-based bonuses, formulary placement fees, price protection guarantees, and administrative fees from manufacturer-funded patient assistance programs. Upstream, the statute imposes a parallel obligation on rebate aggregators and GPOs, which must pass 100% of funds to PBMs within 45 days of each quarter-end. The PBM then has 90 days from the end of each quarter to remit to the plan.

This two-tier timeline creates a structured cash flow: manufacturer payments reach GPOs and aggregators first, flow to PBMs within 45 days, and reach plan sponsors within 90 days. For pricing actuaries, the quarterly cadence introduces a new timing dimension. Under legacy contracts, rebates might settle annually or semiannually with true-up adjustments that created large period-to-period swings in net drug cost PMPM. Quarterly settlement compresses the lag and produces more stable experience data for trend analysis. From tracking plan renewals through multiple PBM contract transitions, the shift from annual to quarterly rebate settlement alone has reduced trend volatility by 1.5 to 2.5 percentage points in early-adopter employer groups.

The legislation carves out one narrow exception: PBMs may retain bona fide service fees (BFSFs) that are transparent, quantifiable, and disclosed to the plan fiduciary. These fees must be flat dollar amounts, not calculated as a function of drug price, wholesale acquisition cost, or utilization volume. The DOL's companion proposed rule, published January 30, 2026, specifies the disclosure mechanics for these fees and applies to self-insured plans with 100 or more participants (Federal Register, January 2026). The practical effect is that PBM revenue models must shift from spread-based to fee-based compensation, a structural change that several industry observers have compared to the commission-to-fee transition in financial advisory services a decade ago.

ERISA Enforcement: How Contract Violations Become Prohibited Transactions

The enforcement teeth distinguish the CAA 2026 from prior PBM reform attempts. Under ERISA Section 408(b)(2), a service arrangement with an employee benefit plan qualifies for the prohibited transaction exemption only if the compensation is "reasonable" and the service provider makes required disclosures. The CAA 2026 amends this framework to classify PBMs as "covered service providers" and defines reasonableness to include the 100% rebate passthrough requirement. A PBM contract that fails to remit all rebates, or that retains remuneration beyond disclosed BFSFs, is no longer "reasonable" under the statutory test (Morgan Lewis, February 2026). The contract falls outside the prohibited transaction exemption, exposing both the PBM and the plan fiduciary to enforcement action.

New ERISA Section 726 establishes a penalty structure with three tiers. First, PBMs face civil monetary penalties of up to $10,000 per day for failures to comply with drug pricing and fee disclosure requirements (Davis Wright Tremaine, February 2026). Second, knowingly providing false information in required disclosures triggers penalties of up to $100,000 per occurrence. Third, the Department of Labor retains authority to pursue additional enforcement under existing ERISA prohibited transaction provisions, which can include disgorgement of improperly retained amounts plus excise taxes under the Internal Revenue Code.

For plan sponsor fiduciaries, the legislation creates new affirmative duties. Receiving PBM disclosures is not sufficient; fiduciaries must review the disclosed information, assess the reasonableness of PBM compensation, identify conflicts of interest, and monitor ongoing compliance (Davis Wright Tremaine, February 2026). The statute provides an "innocent fiduciary" exception, but qualifying requires documented evidence of: lack of knowledge of noncompliance, reasonable belief that the PBM was adhering to contractual terms, a written demand letter upon discovering failures, and notification to the DOL if noncompliance persists beyond 90 days (Morgan Lewis, February 2026). At least once per year, plan fiduciaries must audit PBM compliance, with the fiduciary retaining sole discretion over auditor selection. The PBM cannot fund or influence the audit.

The effective date layers are precise. The covered service provider definitional changes took effect upon enactment on February 3, 2026. The rebate passthrough, reporting, and innocent fiduciary provisions apply to contracts entered into or renewed for plan years beginning on or after August 3, 2028, which translates to January 1, 2029, for calendar-year plans (NFP, February 2026). This 30-month runway gives PBMs and plan sponsors time to renegotiate existing contracts, but health actuaries need to begin modeling the cost impact now for 2029 plan year renewals already in the pricing pipeline.

Semiannual Reporting: The New Transparency Infrastructure

The CAA 2026 establishes a reporting regime that provides health actuaries with data they have never had access to at the plan level. At least semiannually (or quarterly upon request), PBMs must provide detailed reports to large employer plans (100 or more participants) covering six categories: gross and net prescription drug spending, manufacturer rebates and manufacturer-derived compensation, spread pricing with network pharmacies, formulary structure and benefit design rationale, dispensing activity through PBM-affiliated pharmacies, and member cost-sharing metrics (Davis Wright Tremaine, February 2026).

The formulary design reporting is particularly consequential for actuarial work. PBMs must disclose the rationale for formulary placement decisions on drugs exceeding $10,000 in annual plan spending, including whether placement was influenced by rebate levels. This disclosure allows actuaries to assess whether formulary tier assignment reflects clinical value or rebate optimization, a distinction that directly affects the rebate credit component of the four-component pharmacy trend decomposition framework. When a PBM places a higher-cost brand on a preferred tier over a lower-cost alternative because of rebate revenue, the gross ingredient cost is higher but the rebate credit is also higher. Under the old opaque regime, the net effect was invisible. Under the new reporting standards, actuaries can evaluate whether the formulary structure minimizes total plan cost or maximizes PBM revenue.

The affiliated pharmacy dispensing disclosure addresses another blind spot. The three largest PBMs, Express Scripts (Cigna), CVS Caremark (CVS Health), and OptumRx (UnitedHealth Group), each own specialty and mail-order pharmacy operations. When these PBMs steer prescriptions to affiliated pharmacies, the plan pays a reimbursement rate set by the PBM and the PBM's affiliate captures the margin between reimbursement and acquisition cost. The new reporting requirement forces disclosure of what percentage of plan prescriptions are dispensed through affiliated pharmacies and at what reimbursement rates, enabling actuaries to benchmark affiliated versus independent pharmacy costs on a drug-by-drug basis.

NAIC Examination Framework: State Regulators Layer On

Federal enforcement addresses ERISA-governed self-insured plans, but fully insured health plans fall under state regulatory jurisdiction. The NAIC Pharmacy Benefit Management (D) Working Group is building a parallel examination framework that extends regulatory oversight to PBM arrangements across both market segments. At its Spring 2026 meeting in San Diego on March 23, the Working Group advanced a revised Draft PBM Examination chapter that provides examiners with standardized guidance across operations, pricing methodologies, contracts, claims, rebates, network adequacy, utilization review, formularies, complaints, and pharmacy audits (Foley & Lardner, April 2026).

The examination scope now explicitly includes PBM-affiliated group purchasing organizations. Consumer advocates at the Spring meeting urged inclusion of GPOs in the exam scope, greater transparency in GPO operations, and public reporting of examination results. The FTC's concurrent enforcement activity against PBM rebate practices reinforced this push: the FTC's Express Scripts settlement (discussed below) signals federal willingness to treat GPO-level rebate aggregation as part of the PBM oversight perimeter (Foley & Lardner, April 2026). State examiners will now have tools to trace rebate flows from manufacturers through GPOs to PBMs to plans, creating an audit trail that did not exist under previous examination guidelines.

The Working Group adopted PBM Licensure and Regulation Guidelines in December 2025, incorporating revisions from the Michigan Department of Insurance and Financial Services. A State Based Systems (SBS) complaint module targeting availability by June 2026 will handle provider and pharmacy complaints electronically, creating a multi-state database of PBM compliance issues. The NAIC Insurance Commissioner for West Virginia has been particularly active in this space, with that state's experience under a full rebate passthrough mandate providing empirical data that informs the federal framework.

For health actuaries, the layered enforcement creates a compliance multiplier. A PBM operating on behalf of a self-insured ERISA plan faces federal DOL enforcement under the CAA 2026. The same PBM providing services to a fully insured carrier in a state that has adopted the NAIC examination framework faces state-level market conduct examinations. Both enforcement channels converge on the same underlying question: is the PBM remitting all remuneration and operating under delinked, fee-based compensation? Actuaries pricing both self-insured and fully insured products need consistent assumptions about PBM cost structures across both markets, because the enforcement architecture now demands consistency.

Medicare Part D: Bona Fide Service Fees and Any-Willing-Pharmacy

The CAA 2026 addresses Medicare Part D PBM arrangements through a parallel set of provisions with distinct mechanics. The bona fide service fee definition for Part D is stricter than the commercial ERISA framework. A BFSF under Medicare Part D must be: (1) a flat dollar amount, (2) consistent with fair market value as specified by the HHS Secretary, (3) for a service actually performed by the PBM on behalf of the PDP sponsor, and (4) not directly or indirectly based on, or contingent upon, drug pricing, discount amounts, rebate levels, formulary placement decisions, or business volume generated between the parties (Ankura, March 2026). The OIG will review whether remuneration under PBM-PDP sponsor arrangements is consistent with fair market value, though the statute does not define fair market value itself, leaving that to rulemaking.

PBMs operating in Medicare Part D are prohibited from deriving "remuneration tied to the utilization of covered Part D drugs, other than a BFSF" (Sidley Austin, February 2026). This prohibition effectively eliminates spread pricing and utilization-based compensation models in the Part D market. The structural parallel to the commercial market mandate is intentional: Congress aligned the compensation framework across both ERISA and Part D to prevent PBMs from maintaining spread-based models in one market while operating under fee-based models in the other.

The any-willing-pharmacy provisions take effect for the 2029 plan year. The HHS Secretary must establish "reasonable and relevant" contract standards for pharmacy network participation by April 1, 2028, based on a request for information due April 1, 2027 (Ankura, March 2026). Beginning January 1, 2029, Part D plan sponsors must accept any pharmacy into their network that agrees to the standardized contract terms, with enhanced protections for essential retail pharmacies in underserved areas. The statute defines essential retail pharmacies by geographic isolation: rural (10+ miles from the nearest competitor), suburban (2+ miles), and urban (1+ mile). PDP sponsors must begin reporting affiliate pharmacy lists and incentive payments for plan year 2027.

Annual PBM reporting to Part D plan sponsors begins with data for plan year 2027, due by July 1, 2028. Reports must include drug-level pricing and reimbursement data, affiliated pharmacy dispensing activity and comparison to non-affiliated pharmacies, generic and biosimilar formulary justifications, manufacturer agreement disclosures, 340B drug dispensing transparency, and aggregate spending metrics. PDP sponsors must audit PBMs at least once annually. Violations trigger civil monetary penalties or intermediate sanctions, with PBMs required to reimburse PDP sponsors for any penalties resulting from delegated responsibility violations.

The FTC Settlement Precedent: Express Scripts Delinks Compensation

On February 19, 2026, the FTC secured what it characterized as a "landmark settlement" with Express Scripts, resolving allegations that PBM rebate practices artificially inflated drug list prices and increased patient out-of-pocket costs (FTC, February 2026). The settlement requires Express Scripts to introduce a standard offering for plan sponsors by January 1, 2028, that allows transitions off rebate-guarantee contracts. More significantly, the settlement mandates that Express Scripts delink manufacturer compensation from drug list prices, increase transparency through drug-level reporting to plan sponsors, transition retail community pharmacy reimbursement to a cost-plus model, and reshore its group purchasing organization Ascent from Switzerland to the United States.

The FTC estimates the settlement will lower patient drug costs by up to $7 billion over ten years and generate millions in new revenue for community pharmacies annually (FTC, February 2026). The agency's parallel litigation against OptumRx and CVS Caremark continues, with CVS Health publicly indicating "good faith negotiations" with FTC staff on a potential settlement. For health actuaries, the FTC enforcement creates a de facto industry standard that mirrors the CAA 2026 statutory requirements. Even before the January 2029 effective date for ERISA plans, the three largest PBMs will be operating under either statutory mandates (CAA 2026), consent decrees (Express Scripts), or active litigation pressure (OptumRx and CVS Caremark) to adopt delinked, transparent compensation structures.

The cost-plus pharmacy reimbursement requirement in the Express Scripts settlement is worth particular attention. Under the traditional model, PBMs reimbursed pharmacies at rates significantly below the amounts they charged plans, capturing the spread. Under cost-plus, the pharmacy receives its acquisition cost plus a dispensing fee. This eliminates one source of margin that PBMs historically retained and simplifies the pharmacy cost component for actuarial modeling: ingredient cost is acquisition cost, and dispensing cost is a transparent fee, rather than a negotiated reimbursement rate that embedded PBM margin.

Actuarial Modeling Impact: Repricing Net Drug Cost Assumptions

The combined effect of the CAA 2026, NAIC examination framework, and FTC enforcement reshapes the actuarial modeling of pharmacy benefits across three dimensions: the cost structure itself, the data available for trend analysis, and the credibility framework for transitioning between regimes.

Cost structure repricing. When PBMs shift from retained-rebate to full-passthrough models, the plan's net drug cost per member per month changes by the amount of the previously retained spread. From modeling this transition across client groups with varying formulary compositions, the net cost shift ranges from 8% to 15% depending on therapeutic category mix. Plans with heavy specialty drug utilization (oncology, autoimmune, rare disease) see the largest shift because specialty rebates have historically been the most opaque and the most variable. Plans with formularies dominated by generics see smaller shifts because generic drugs carry minimal manufacturer rebates. The GLP-1 therapeutic class is a special case: rebate levels for semaglutide and tirzepatide remain below 10%, well under the 30% average for established brand therapeutic classes, so the passthrough mandate has a muted effect on GLP-1 net costs compared to categories like diabetes insulins or autoimmune biologics (see our GLP-1 trend factor framework for the NDC-level methodology).

Data quality improvement. The semiannual reporting provisions create a data infrastructure that health actuaries have lacked. Drug-level gross and net spending, rebate amounts by therapeutic class, spread pricing by network pharmacy type, and affiliated pharmacy dispensing rates all become available at the plan level. For employer groups with 100 or more participants, the reporting cadence is semiannual or quarterly upon request. This transforms pharmacy cost from a single net PMPM line item into a decomposed dataset that supports the four-component trend model: gross ingredient cost, utilization and mix shift, manufacturer rebate credit, and PBM administrative fee. The credibility of each component improves as the data becomes drug-level rather than aggregate, and plan-specific rather than PBM-wide.

Transition credibility. The practical challenge for pricing actuaries working on 2029 plan year renewals is that historical experience data was collected under the old net-of-retained-rebate framework, while forward projections must use the new full-passthrough framework. West Virginia's experience provides the most credible calibration benchmark. That state implemented a full rebate passthrough mandate in 2022 and now has four years of experience data. For 2026 coverage, average group health plan rate increases in West Virginia fell from 19.7% to 12.6%, a reduction of approximately 40%, with one large insurer cutting rates by 2.91% instead of the 5.09% increase originally filed (BenefitsPRO, February 2026). Small group plans saw rate increases cut by 52% in 2025. These results provide an empirical anchor, but credibility weighting is essential because West Virginia's market size, insurer mix, and formulary composition differ from national averages.

The PCMA confirmed on April 9, 2026, that the market and federal law have now made 100% rebate passthrough the industry baseline, with PBM CEOs testifying that 98% to 100% of negotiated rebates already flow to employers in recent contracts (PCMA, April 2026). If this claim holds, the net cost shift for plans already receiving near-full passthrough will be minimal, and the primary actuarial impact will come from the new data transparency rather than the cost structure change. Plans that were receiving less than full passthrough, particularly smaller employer groups with less negotiating leverage, will see the largest cost reductions.

Implementation Timeline for Actuarial Planning

Date Milestone Actuarial Implication
Feb 3, 2026 CAA 2026 signed; PBM classified as covered service provider under ERISA Begin monitoring PBM contract language for passthrough provisions
Jan 30, 2026 DOL proposed PBM fee disclosure rule published Track final rule for applicability to plan years beginning July 1, 2026
Jan 1, 2028 Express Scripts standard offering available; Part D reforms effective Update Medicare Part D bid models for delinked PBM compensation
Apr 1, 2028 HHS any-willing-pharmacy contract standards finalized Model network adequacy and reimbursement rate impact on Part D costs
Jul 1, 2028 First Part D annual PBM reports due (plan year 2027 data) First plan-level drug cost decomposition data available for Part D
Aug 3, 2028 ERISA passthrough provisions effective for new/renewed contracts All 2029 plan year renewals must use full-passthrough cost assumptions
Jan 1, 2029 Calendar-year ERISA plans, Part D any-willing-pharmacy effective Full-year pricing models must reflect passthrough, delinked PBM fees

Why This Matters for Health Actuaries

The PBM reform provisions in the CAA 2026 do not merely change a disclosure requirement or add a reporting obligation. They restructure the economic relationship between PBMs, plan sponsors, and manufacturers in a way that rewrites the actuarial cost assumptions embedded in every health plan pricing model. The enforcement architecture, layering ERISA prohibited transaction rules with $10,000/day penalties, NAIC state examination authority, and FTC consent decree obligations, makes noncompliance economically untenable. PBMs will comply because the cost of noncompliance exceeds the margin they would retain.

For pricing actuaries, the immediate task is clear: 2029 plan year renewals are already in the pipeline, and the pharmacy trend assumptions underlying those renewals must reflect the new cost structure. Plans currently receiving near-full rebate passthrough will see minimal cost change but will gain new data transparency. Plans receiving partial passthrough, particularly smaller employer groups, will see net drug cost reductions of 8% to 15%. The broader employer health cost environment, with Mercer reporting 6.5% total cost acceleration and pharmacy as the fastest-growing component, means the pharmacy trend assumption is the single highest-leverage variable in the renewal pricing model.

The interaction between PBM reform and the GLP-1 utilization surge adds complexity. GLP-1 drugs carry lower rebate levels than established therapeutic classes, so the passthrough mandate has a smaller net cost effect on the fastest-growing cost driver. Actuaries must apply class-specific rebate percentages rather than a blended average, or the projection will understate the GLP-1 component and overstate the rebate credit for the rest of the formulary. The newly public prior authorization metrics from CMS-0057-F add another calibration point: as health plans face transparency pressure on utilization management, the interaction between formulary design, prior authorization stringency, and PBM rebate optimization becomes visible for the first time.

Patterns we have seen in early adopter states: the transition from net-of-rebate to full-passthrough pricing is not a one-year adjustment. It takes two to three renewal cycles for experience data under the new regime to develop sufficient credibility to stand on its own, and during the transition period, actuaries must bridge between regimes using hybrid credibility frameworks. The pricing work starts now, not in 2029.

Further Reading

Sources