The Medicare Prescription Drug Benefit: How Will The Game Be Played?

Abstract

PROLOGUE:Thirty-five years ago, when Congress created Medicare, it decided that private health insurers, under contract to the federal government, should serve as the program's paymasters. These agents were seen as a buffer between a government perceived as all-powerful and providers who were seriously concerned about the newly prominent federal role in the health care system. Today, a generation later, Congress is moving toward serious consideration of expanding Medicare benefits to include coverage of outpatient prescription drugs. No one disputes that leaving outpatient drugs uncovered is a serious shortcoming of Medicare, but how to pay for and administer the benefit are among the tall questions facing Congress. A number of different proposals have been advanced, but one of their common threads is reliance on pharmacy benefit managers (PBMs) as the administering agents. However, these proposals contain few details on how PBMs would operate, particularly as an agent of the government, rather than private employers.In this important paper Haiden Huskamp and three of her colleagues at Harvard University begin to flesh out these details. Huskamp is an assistant professor in the Medical School's Department of Health Care Policy. Meredith Rosenthal is an assistant professor in the Department of Health Policy and Management, School of Public Health. Richard Frank is the Margaret T. Morris Professor of Health Economics at Harvard, and Joe Newhouse is the John D. MacArthur Professor of Health Policy and Management there. Most recent proposals to add a prescription drug benefit to the Medicare program suggest using pharmacy benefit managers (PBMs) to control costs and promote quality. However, the proposals give little detail on the institutional arrangements that would govern PBM operations and drug procurement. The recent Congressional Budget Office cost estimate of the Clinton administration's proposal reflects this lack of detail on how PBMs would function. We sketch an approach for structuring PBM operations that focuses on competition among PBMs, manufacturers, and distributors; incentive pricing; and risk sharing with PBMs.