CAA 2026 Part 2: Rebates, PBM Compensation and the Real Cost of Prescription Drugs

Rebates have become one of the most visible parts of PBM contracting because they are easy to quantify and easy to compare. A PBM guarantees a certain amount per brand prescription, the employer lines it up against competing proposals, and the higher number looks better.

The problem is that the rebate itself does not tell you whether the employer is buying the drug efficiently.

If a medication costs $1,200 and produces a $500 rebate, the net cost is still $700. If a clinically appropriate alternative costs $650 and produces very little rebate, the lower-rebate drug may actually be the better financial decision.

That is why I think employers need to get away from the idea that the biggest rebate equals the best deal. The goal is not to generate the most rebate revenue. The goal is to buy the right medication at the lowest reasonable net cost.

Those are not always the same thing.

CAA 2026 generally requires PBMs serving ERISA group health plans to pass through 100% of qualifying rebates, discounts and other remuneration connected to the plan. Just as important, the law also requires more detailed reporting so employers can better understand what was received, what was passed through and what was retained.

That matters because a contract can say “100% rebate pass-through” and still leave room for other forms of compensation that may not fall under the PBM’s definition of a rebate.

Manufacturer service fees, administrative payments, data fees, other discounts and different forms of remuneration can all complicate the picture.

That is a much better question.

I do not think the goal here should be to vilify PBMs for making money. They perform real services and they should be paid for those services.

They build and manage pharmacy networks. They process claims. They negotiate with manufacturers. They manage formularies. They administer specialty pharmacy programs. They handle a lot of the infrastructure required to operate a pharmacy benefit.

The issue is not whether they make money. The issue is whether the employer knows how much they make and where it comes from.

I would much rather see an employer pay a clearly disclosed and reasonable administrative fee than believe the PBM is charging almost nothing while making significantly more money somewhere else in the arrangement.

That, to me, is the real transparency issue.

Visible fees are easy to understand. If the PBM charges $5 PEPM, the employer sees it.

Indirect compensation is where things get more complicated.

A PBM or one of its affiliates may make money through manufacturer payments, spread pricing, specialty pharmacy margins, mail-order arrangements, network economics or other relationships tied to the plan’s prescription drug utilization.

CAA 2026 should make more of those arrangements visible.

And that matters because financial incentives can influence decisions.

If a PBM makes more money when a higher-rebate drug is placed on formulary, there is at least a potential incentive to favor that drug.

If the PBM owns the specialty pharmacy and earns more when prescriptions are filled there, there is an incentive to steer business in that direction.

If the PBM earns spread between what it charges the employer and what it pays the pharmacy, there is an incentive to maximize that difference.

None of that automatically means the arrangement is bad. But the employer should be able to see it, understand it and decide whether it is producing the right result.

You cannot evaluate an incentive you cannot see.

If there is one area employers should pay particularly close attention to, it is specialty pharmacy.

A relatively small number of specialty claims can drive a huge portion of total pharmacy spend. When a single medication costs tens or hundreds of thousands of dollars a year, even a modest difference in acquisition cost or margin can become a very big number.

That is especially important when the PBM also owns or is affiliated with the specialty pharmacy filling the prescription.

Again, that does not automatically mean there is a problem. The affiliated specialty pharmacy may be competitive and may provide excellent service.

But the employer should know.

What did the plan pay?

What did the specialty pharmacy receive?

Was the medication subject to rebates or other manufacturer payments?

Was there a biosimilar or clinically appropriate alternative?

Could another channel have provided the medication for less?

Was the member required or strongly encouraged to use the PBM-owned pharmacy?

These are the kinds of questions employers should be asking now, not three years from now.

CAA 2026 also increases transparency around certain compensation paid to brokers, consultants and advisors in connection with PBM business.

I think that is good for the industry.

If an employer is relying on someone to help choose between PBMs, it should know whether that person is also being paid by one of the PBMs under consideration.

That does not mean the compensation is improper. It does mean it should be disclosed.

The same principle applies across the board. Compensation is not the problem. Hidden compensation is.

If an advisor is paid by the employer, by the PBM or by both, the employer should understand the arrangement. If compensation changes based on which PBM is selected, the employer should know that too.

Employers should be able to follow the money from beginning to end.

If there is one thing I would like to see come out of CAA 2026, it is a shift away from evaluating pharmacy contracts primarily on discounts and rebates and toward evaluating them on net cost.

Not the biggest rebate.

Not the deepest AWP discount.

Not the lowest dispensing fee.

Not the lowest administrative fee.

All of those numbers can matter, but none of them tells you the whole story.

The real question is what the plan spent after every component of the transaction is included.

What did the drug cost?

What did the plan pay?

What did the member pay?

What did the pharmacy receive?

What did the manufacturer pay?

What did the PBM keep?

What did an affiliated pharmacy earn?

What was the final net cost?

That is the analysis that matters.

This is another area where I think employers get tripped up.

A PBM proposal with a $2 PEPM administrative fee looks better than one with an $8 PEPM fee. A zero-dollar fee looks even better.

But no PBM is working for free.

If one PBM charges a transparent $8 PEPM and passes nearly everything else through, while another charges $2 PEPM but makes significantly more through spread, specialty pharmacy margin and manufacturer payments, the lower administrative fee may actually be the more expensive arrangement.

You cannot tell which one is better by looking at the admin fee alone.

You have to look at total economics.

That is where CAA 2026 should help, but employers and advisors still have to do the work.

I think this is going to change PBM procurement too.

Most PBM RFPs are full of discount guarantees, rebate guarantees and fee comparisons because those numbers fit neatly into a spreadsheet.

That does not mean they are the best way to evaluate the contract.

Going forward, employers should spend more time looking at total compensation, net drug cost, access to claims-level data, specialty pharmacy economics, affiliated entities, audit rights and the employer’s ability to validate the PBM’s performance independently.

Definitions matter too.

If the PBM says it passes through 100% of rebates, define rebate.

If the PBM says there is no spread, define spread.

If the PBM says it is transparent, define exactly what data the employer will receive and how often.

The contract language is where the promises either become real or disappear.

CAA 2026 gives employers some time before the major commercial PBM provisions become effective, but I would use that time to start evaluating current arrangements.

Ask the PBM to identify every source of direct and indirect compensation tied to your plan.

Ask what manufacturer payments are included in the rebate definition and what is excluded.

Ask whether there is spread anywhere in the arrangement.

Ask how much money is generated through affiliated specialty pharmacy operations.

Ask who owns the claims data.

Ask whether the employer can receive claims-level pharmacy data and take it with them if they change PBMs.

Ask whether the broker or consultant receives compensation tied to the PBM relationship.

If that is hard to answer, you have probably found the exact problem CAA 2026 is trying to address.

The pharmacy system is not going to become simple because of CAA 2026. Rebates will still exist. Specialty drugs will still be expensive. Manufacturers will still negotiate with PBMs. Employers will still have difficult coverage decisions to make.

What should change is how much of the financial picture the employer can actually see.

If the PBM makes $1 million managing the account, the employer should understand how that $1 million was generated.

If manufacturers pay $2 million tied to the employer’s drug utilization, the employer should know where that money went.

If an affiliated specialty pharmacy makes a significant margin on the plan’s highest-cost medications, the employer should be able to evaluate whether that arrangement is competitive.

I do not think that is unreasonable.

Employers are spending enormous amounts of money on healthcare. They should understand how the people managing that money are being paid.

CAA 2026 should make that easier.

The real value will come from employers actually using the information.

In **Part 3**, I’ll look at CAA 2026 through the employer fiduciary lens, including PBM compensation disclosures, ERISA Section 408(b)(2), vendor oversight and why having more information may actually increase the importance of documenting how pharmacy decisions are being made.

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