Discussions of the Medicare drug benefit have focused more on what beneficiaries will pay than what pharmaceutical manufacturers will receive. A key choice is the degree to which Medicare must become involved in setting manufacturers' prices. If prices must be set, Medicare could do so using average wholesale price, comparison with prices in other markets, cost, or rate-of-return regulation. Because all four methods have substantial drawbacks, Medicare should not initially attempt to set prices, but to prevent abuses in pricing, Congress should allow cost to be considered in coverage decisions.