Pharmacy has become one of the largest and least visible cost lines employers manage. Pharmacy now accounts for 25% of employer healthcare spending and is projected to increase 12% in 2026, according to Business Group on Health's 2027 survey of large employers. Employers, brokers, and lawmakers have responded by pressing for more visibility into how pharmacy benefit managers (PBMs) are paid and how much of the value they negotiate reaches the plan.

That pressure has produced PBM reform: federal and state action that sets new rules for PBM compensation, disclosure, and rebate pass-through. Congress enacted federal PBM requirements for employer group health plans in February 2026, though they do not take effect until late 2028 or later. Benefits leaders who understand what reform requires, and what it still leaves to contract negotiation, can evaluate their PBM on firmer ground today.

What Is PBM Reform?

Yes, PBM reform is a collaborative effort at the federal and state levels to create new regulations that curb the harmful practices of traditional PBMs. These regulations are catching up to what some modern PBMs, like SmithRx, have been doing from the start: ending spread pricing, 100% rebate pass-through, and total transparency. No single law defines it. State laws, federal ERISA requirements, and agency rulemaking each address different parts of the PBM business model.

The word reform is intentional when talking about these sweeping (both proposed and enacted). The pharmacy benefits system is so broken that a few quick changes can’t deliver the progress required to meet the needs of employers and members. There has to be a fundamental shift in the way we structure pharmacy benefits practices. The opaque, damaging practices of the PBMs that have majority control over the United States’ market aren’t new: they’re systematic.

Reform often focuses on three legacy PBM practices that can keep employers and members paying more:

• Spread Pricing: This is a practice where a legacy PBM charges a health plan or insurer a higher price for a drug than it pays the pharmacy that dispensed it. The PBM then keeps the difference, or the "spread," as profit. Because many contracts do not disclose pharmacy reimbursement, plan sponsors often cannot see the spread.

• Opaque Rebate Structures: With legacy PBMs, there is little to no visibility in how discounts and rebates work. In exchange for placing a manufacturer’'s drugs on a health plan's preferred list (or formulary), PBMs often receive rebates. They may keep a portion of the rebate as profit, rather than passing all of the savings on to the employer or member, which can contribute to higher drug costs.

• Misaligned Incentives: When a PBM's revenue grows with retained rebates, spread, or volume through pharmacies it owns, its incentives can diverge from the plan's goal of the lowest net cost and appropriate care. Some PBMs sit in the same corporate family as the insurer and the dispensing pharmacy, an arrangement known as vertical integration.

Why Now? Key Drivers of Reform

Several pressures have converged behind PBM reform. Rising prescription drug costs strain employer budgets and member out-of-pocket spending. Employers and brokers want clearer insight into how PBMs manage benefits, structure pricing, and pass along rebates. At the same time, patients are becoming more vocal about their high out-of-pocket costs, which they increasingly associate with pharmacy benefit managers.

Those patients are also constituents, and their concerns have reached state and federal lawmakers. A wave of bills and regulations have been introduced at the state level, specifically targeting PBM practices, with many states enacting laws to increase transparency, prohibit spread pricing, and address conflicts of interest. At the federal level, PBM business models drew bipartisan scrutiny, and in February 2026 Congress enacted PBM requirements for employer plans.

Media coverage of legacy PBMs has also grown, often centered on members facing high costs and access barriers. With each new government report, news investigation, and proposed law, pressure for PBM transparency builds.

Market pressure is changing PBM models as well. Some modern PBMs already operate with radically transparent practices, which gives plan sponsors a working benchmark for what reform asks of the rest of the market.

Core Areas of PBM Reform

PBM reform concentrates on four areas: how rebates and spread are handled, what price and plan data clients can see, how formularies are built, and who is accountable for the result. Each one maps to a question plan sponsors can already put to their PBM at renewal.

Rebate Transparency and the Elimination of Spread Pricing

Efforts to establish rebate transparency and eliminate spread pricing aim to ensure that savings from drug manufacturers are reflected in the final price of drugs that employers and members pay, rather than being kept as profit by the PBM.

Real-Time Price Disclosure and Data Access

PBM reforms seek to give clients and members real-time price disclosure, so they can make informed decisions and avoid surprise costs. They also seek to give plan sponsors broader access to their own claims and compensation data, which is what allows an employer to verify a PBM's savings claims.

Formulary Design Reform

On top of enhanced access to pricing and data, reform also supports a shift toward value-based formularies that prioritize a drug's effectiveness and true cost over the size of its rebate.

Accountability and Fiduciary Responsibility

Reform also reinforces fiduciary responsibility, the legal duty plan sponsors have to act in the best interest of their members. PBM compensation tied to retained rebates or spread can sit in tension with that duty. That is why reform pairs disclosure with audit rights that let fiduciaries verify what their PBM bills them.

Where Federal PBM Reform Stands in 2026

On February 3, 2026, federal PBM reform became law through the Consolidated Appropriations Act, 2026 (CAA 2026). The law established reporting and pass-through requirements for employer plans.

PBMs must report to the plan at least every six months, or quarterly when the plan requests it. A PBM contract also counts as reasonable under the Employee Retirement Income Security Act (ERISA) only if the PBM remits all rebates, fees, and other drug-related remuneration to the plan, with an annual audit right. Both requirements apply to plan years beginning 30 months after enactment, so most calendar-year plans will see them first in 2029. The pass-through requirement reaches contracts entered into, renewed, or extended on or after that date.

On October 29, 2026, the Department of Labor announced a final rule implementing the law’s transparency provisions. The rule requires PBMs and their affiliated brokers and consultants to disclose fees and compensation to fiduciaries of large employers’ self-insured group health plans. PBM disclosures must include manufacturer rebates and other payments, compensation from the difference between what a plan pays for a prescription and what the pharmacy receives, and payments recouped from pharmacies.

The final rule also allows plan fiduciaries to audit PBM disclosures and provides additional relief if a PBM fails to meet its obligations. These disclosures can help employers assess PBM compensation and negotiate contracts with greater visibility into how prescription drug dollars flow.

How SmithRx Approaches PBM Reform

Many of the requirements reform now sets for PBMs, including full rebate pass-through and regular reporting to the plan, are already part of how we work with employers. For benefits leaders who want to update their RFPs for reform, our model offers a concrete reference point for comparing PBM proposals before federal deadlines arrive.

Transparent, Pass-Through Model

We earn revenue through a fixed per-member, per-month (PMPM) administrative fee, pass through 100% of manufacturer rebates to the plan, and do not use spread pricing. Because our compensation does not increase when drug costs rise, our incentives stay aligned with the plan's goal of reaching the lowest net cost for clinically appropriate medications.

Clinically-Backed Formularies and Plan Data Access

We design formularies to favor clinically effective medications at the lowest net cost, and our Drug Pathways Engine helps identify and activate clinically appropriate savings opportunities. This pricing structure is supported by readily available insights and rebate visibility on our Partner Portal, which give employers access to their spending data to make informed decisions.

PBM reform is setting a federal baseline for rebate pass-through and reporting, but the timelines are long, and much of what an employer receives still depends on the contract it signs. Plan sponsors that evaluate PBMs on compensation, data access, and audit rights today can hold their PBM to those standards well before the federal deadlines. Talk with our team of PBM experts today to learn just how easy, and impactful, making the switch to a modern PBM could be for your business.

Frequently Asked Questions

Is a PBM the same as a health insurer?

A PBM is a separate organization that manages prescription drug benefits for health insurers, employers, and other payers by processing claims, managing formularies, and negotiating manufacturer rebates and pharmacy discounts. Some of the largest PBMs share corporate ownership with major insurers, which is one reason vertical integration is a focus of reform.

Who are the largest PBMs in the U.S.?

The three largest PBMs are CVS Caremark, Express Scripts (owned by Cigna), and Optum Rx (owned by UnitedHealth). Each operates inside a larger healthcare company that also includes insurance and pharmacy businesses.

Does PBM reform apply to smaller employer plans?

The CAA 2026 reporting requirements cover group health plans broadly, but detailed drug-level reports apply to plans of employers with 100 or more employees or plans with 100 or more participants, while smaller plans receive a summary. State PBM laws vary, so employers should confirm with their broker or benefits counsel which rules reach their plan.

Do employers have to wait for the federal deadlines to get full rebate pass-through?

Employers do not need to wait, because rebate pass-through, claims-level reporting, and audit rights are contract terms a plan sponsor can negotiate at any renewal. Our questions to ask your PBM about pricing transparency cover what to request and how to verify it.