The Medicare prescription drug benefit: how will the game be played?

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.