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HEALTH POLICY Who Will Manage A Medicare Drug Benefit?New Proposal Receiving Government Attention With the average annual out-of-pocket health care bill for seniors now topping $2,430 and climbing—and with 17 percent of that figure spent on drugs—some of the nation's elderly report having to weigh grim choices like whether to purchase food or life-saving medications. Such accounts, combined with stories of desperate seniors traveling to Canada and Mexico where cheaper medications are available, have fueled calls this election year for passage of a Medicare prescription drug benefit bill. President Clinton's recently announced budget asks Congress for $160 billion over 10 years to fund a Medicare drug plan, and an additional $35 billion to help those who require the most expensive kinds of medicine. But how will the plan work? What types of institutions will be needed to manage these funds and the benefit?
Later this month, Richard Frank (above) and Haiden Huskamp (below) will discuss with Congressional staffers their proposal about a Medicare prescription drug benefit.
Key PlayersRealizing that such essential questions need to be discussed and answered before any plan makes its way through Congress, four Harvard researchers have moved the debate forward with a proposal in the March/April issue of Health Affairs, published this week.Titled "The Medicare Prescription Drug Benefit: How Will The Game Be Played?" the proposal examines how pharmacy benefit management organizations—which already provide drug benefits to half the insured population in the U.S. as overseers of state and federal employee health plans—could run a Medicare drug plan while utilizing powerful market forces to manage costs and hold down program growth. "While the use of pharmacy benefit managers to run a Medicare drug bill has been discussed since last year, and many government proposals now incorporate them, scant work has been done to define how they would actually operate, making it difficult for the Congressional Budget Office to effectively rate the various proposals," says Haiden Huskamp, HMS assistant professor of health economics in the Department of Health Care Policy and a lead author on the proposal. Richard Frank, professor of health economics in the department, adds, "We don't in any way expect that A, this proposal is the final word, or B, that it's a complete solution. Its aim is to put on the table some issues that if not seriously examined, could leave the various plans forever floating in generalities, and we would never be in a position to get concrete about what the costs and benefits are. Just saying that we are going to delegate this to pharmacy benefit managers isn't good enough." Developed also by Meredith Rosenthal, assistant professor of health economics and policy at HSPH, and Joseph Newhouse, HMS professor of health care policy, the proposal will be discussed by Frank and Huskamp at a health policy forum in Washington, D.C. on March 31 for Congressional staffers who will be refining Capitol Hill's Medicare drug bills. Rules of the GameWhile 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. Such pricing would reflect the market in the private sector and thereby avoid the potentially chilling effect that government price setting could have on drug development. The third component crucial to the plan is risk sharing. Under the proposed model, Medicare and pharmacy benefit managers would set a yearly claims target, as well as providing a corridor around this target where either a bonus could be awarded or a limited loss incurred depending on the success in managing drug costs. This cost-containment policy is meant to slow program growth. While the role of pharmacy benefit managers in any Medicare drug plan remains open, their potential for containing costs makes them appealing on Capitol Hill. Equally attractive is their scalability, meaning that Congress could phase in benefit levels over time without redefining the pharmacy benefit manager's role. —John Lacey |
