While their model has several unique components to instill competition, three are key to its success. First, Medicare would allow periodic bidding by pharmacy benefit managers to secure exclusive contracts to provide drug benefits in particular regions. This concept is already finding acceptance in New England and New York, where legislative leaders are discussing the possible formation of a regional drug purchasing pool. The authors suggest defining about 60 equal-sized markets across the country, so pharmacy benefit managers in each region would have comparable bargaining power, and so enough areas exist for multiple managers to thrive and compete. Second, the proposal recommends that each pharmacy benefit manager use an open formulary with incentive pricing to encourage price competition among drug manufacturers.
Open formularies place no restrictions on drugs an enrollee can receive.
With incentive pricing, a reference drug is selected for each drug class, typically the cheapest drug. If a patient fills a prescription for a drug that is not the reference drug, the patient pays not just a higher copayment, but the actual difference in drug cost. This system creates competition among drug manufacturers to offer low prices and requires consumers to shoulder the expense of costlier drugs. Both incentives lead to cost containment, but not price controls. Further, if a drug is unique or without a generic or brand-name alternative, Medicare would pay the lowest transaction price that private managed care plans pay for the drug.