Pharmaceutical benefit management: an alternative approach.

Abstract

H aiden huskamp and her colleagues believe that any Medicare drug benefit should be managed, which, for traditional Medicare, means using pharmacy benefit managers (PBMs). I share that view. However, their Medicare PBM model is constrained by regulations that could have farreaching and unintended consequences. The authors propose that PBMs would bid periodically for an exclusive, regional Medicare franchise. Each monopoly Medicare PBM would offer an open formulary; use therapeutic reference pricing (their “incentive pricing”) based on the Health Care Financing Administration’s (HCFA’s) classification of drugs; and pay HCFA-regulated prices of new drugs until these are included in reference pricing. An alternative approach is a competingPBM model, which would offer seniors a choice between alternative, approved PBMs, analogous to alternative, qualifying plans under Medicare+Choice. Approved plans would be subject to certain coverage requirements but would compete on formulary design, cost sharing such as triple-tier copayments, and other service dimensions. Therapeutic reference pricing could be adopted if it proved to offer value for money, but current privatesector evidence suggests that it does not. The authors dismiss this competing-PBM model on grounds of adverse selection, citing the selection bias experienced by Medigap plans that offer drug coverage. Adverse selection is a concern for Medigap insurers, which are fully at risk for enrollee costs. Adverse selection also raises Medigap premiums paid by enrollees. However, adverse selection risk would be much reduced once drug coverage for seniors is made virtually universal by being heavily subsidized. Moreover, if PBMs are reimbursed for costs plus an administrative fee, this implies almost perfect ex post risk adjustment of premiums, except for risk sharing capped at 5 percent of total costs. With PBMs only minimally at risk; per patient costs limited to, say, $2,500 per patient per year (50 percent of $5,000); and open enrollment, neither adverse selection nor cream skimming seems a sufficiently large threat to warrant the regulatory fix of regional monopolies and reference pricing. The disadvantages of monopoly PBMs are not simply the familiar monopoly problem of weak incentives to deliver value for money to captive customers, who cannot vote with their feet. Less obvious but potentially more serious are the consequences of reference pricing, which is not an incidental addition but a logical component of the monopoly PBM model. A monopoly PBM model leads to an open formulary, since monopoly PBMs could exploit undue monopsony power if empowered to select drugs for preferred formulary status. But since the open formulary robs PBMs of their leverage in bargaining with drug manufacturers, reference pricing follows