Many of the various government proposals for a Medicare Prescription Drug Benefit under review, including the administration's, discuss the use of prescription benefit managers. This proposal, however, shows in detail how prescription benefit managers could work to preserve the use of decentralized market forces found in the private sector while protecting Medicare beneficiaries from substantial risk. While their model contains several ideas to contain cost and promote quality in a free market system, three are essential to its success. First, Medicare would allow pharmacy benefit managers to bid periodically to secure an exclusive contract for a particular region. They suggest defining about sixty equal-sized markets across the country, so that pharmacy benefit manager contractors in each region would have comparable bargaining power, and so that enough areas exist for multiple pharmacy benefit managers to thrive and compete.
Open formularies place no restrictions on drugs an enrollee can receive.
Using incentive pricing, a reference drug is selected for each drug class, typically the cheapest drug. This system creates competition among drug manufacturers to offer low prices to pharmacy benefit managers so that their product will become a reference drug, and it asks consumers to shoulder the added expense of the non-reference drug. 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. Under their model, however, they show how a modest level of risk sharing between Medicare and pharmacy benefit managers can create greater incentives for containing drug costs.