Smarter Decisions, Superior Outcomes

How Formularies Make an Impact

Posted by Denika Hockenhull on September 29, 2016 at 9:05 AM

Over the past few years, prescription drug costs have risen in a dramatic fashion. According to a federal report released this spring, prescription-drug spending rose 12.6% in 2014 and spending is expected to rise 7.3% a year through 2018. The increased cost is most closely associated with the influx of specialty drugs—high-cost prescription medications used to treat complex, chronic conditions. Rather than offset these prices, generic drugs costs are also experiencing an increase in price adding to the prescription drug cost burden. Drug utilization and the increasing cost of prescription drugs for members who require these medications as maintenance therapy is constantly in the forefront of discussion.

Health plans are looking for ways to lessen the dollar burden. One such cost containment measure is formulary management, but as we will soon see, even this traditionally prudent method to counterbalance high drug costs has undergone several changes to make more of an impact.

Why rely on Formulary Management?

Formulary management is routinely used by health plans, pharmacy benefit management companies (PBMs), and other health administrators to enable health care professionals to promote clinically sound, cost-effective medication therapy. The formulary lists preferred generic and brand-name medications that are approved by the Food and Drug Administration (FDA) and covered by a patient’s health plan. Formularies can be incentivized through brand preference and rebate opportunities, which can benefit plans.

Formularies, now a widespread and effective practice, have several distinct advantages and disadvantages across all major stakeholders within the continuum of care.

For health plans, formularies create advantages by providing an opportunity for cost savings through Preferred Drug Lists (PDLs) and drug rebate programs. Drug rebate programs manage contracts between health plans and drug manufacturers to ensure the manufacturer’s prescription drug products are listed on a formulary or PDL. And using State Medicaid programs as an example; given the importance to manufacturers of having their drugs accessible without prior approval, state Medicaid programs have found that their PDLs can serve as leverage in securing supplemental rebates from manufacturers.

Patients can experience increased confidence as they know what drugs they should expect when filling their prescriptions; however, there is little consideration to alternate therapies. In certain cases, plans require patients first try certain drugs to treat medical conditions before covering another drug for the same condition.


  • Patients are guaranteed the most cost effective, safest, and efficacious medications as chosen by the P&T committees that drive the individual PDLs
  • Patients are protected against receiving overly marketed prescription medications when adhering to a predetermined formulary


  • Needless hurdles in order to cost contain (waiting for PAs for non-preferred drugs)
  • Cost containment is taken into consideration when drugs are chosen for a PDL, therefore the entire decision to make a drug a preferred agent is not solely based on safety and efficacy. 

Providers are able to rely on rules that guide drug coverage, including prior authorization, limits on drug quantity if necessary, and devise step therapy for treatment approaches. Step therapy provides a tiered approach to drug selections. If one drug is attempted and unable to achieve the desired response in the patient, another medication is attempted from a higher tier. When based on evidence-based guidelines, this graduated approach to treatment increases clinical rigor and benefits patients by ensuring the safest, most efficacious therapy.

Pros of formularies for providers:

  • Formularies designate drugs of choice which can help guide more rational and evidence based prescribing
  • Over marketing of prescription medications is taken out of the equation when prescriber is making medication selection for the patient

Cons of formularies for providers:

  • Needless hurdles in order to cost contain (Processing PAs for non-preferred drugs)
  • Limits clinical autonomy of prescriber
  • Cost containment is taken into consideration when drugs are chosen for a PDL, therefore the entire decision to make a drug a preferred agent is not solely based on safety and efficacy. 

Issues surrounding formulary management

There is considerable debate surrounding formulary management with issues ranging from cost controls to drug categorization and efficacy.

When we speak of a drugs categorization in formulary management terms, we are referring to whether the drug is considered as preferred or not preferred. The reasoning behind these indications is based primarily on the drug’s cost in comparison to other drugs within the same class or drugs that have the same indication. The status of a preferred drug is associated with lower net cost to the pharmacy benefit plan and generally a lower cost to the patient as well. The existence of a preferred drug list allows for more uniform drug selections and consistent pricing for consumers to be observed.  But, the issue here is efficacy – a drug may have evidence-based proof of superior outcomes, yet, because it does not carry a manufacturer rebate, it is categorized as non-preferred.

Other potential disadvantages of statewide formularies are associated with closed or open formulary policies. Closed formularies may provide a list of medications that may not be available for coverage, yet open formularies may not provide incentive to prescribe their listed medications. An alternative is the existence of an intermediate approach in the form of an incentive formulary that can provide financial incentives for patients and physicians to select certain drugs and at the same time providing some degree of coverage.

The Presence of Statewide Medicaid Formularies

The majority of states now offer pharmacy services programs with the purpose of providing formulary medications and individual specific prescriptions. These programs not only provide medications but they also provide personalized and individualized pharmaceutical counseling to individuals upon request. Combined, the formulary and pharmacy services create a comprehensive plan for managing care.

Overtime several states have instituted a single or statewide formularies for their Medicaid plans. In most cases, the end goals for designing a shared formulary can be seen as:

  1. Controlling costs that can be incurred by the state.
  2. Ensuring that patients are being provided with appropriate drug therapies.
  3. Identifying possible contract opportunities that can be used to further improve the program.

When a single formulary is used by all Medicaid MCOs within a state, all Medicaid beneficiaries have comparable access to the same set of medications. A single, statewide formulary provides a uniform schedule for health care providers, contrasting greatly with the presence of multiple formularies that can often place significant burdens on pharmacies as well as the pharmacists and prescribers. In the case of multiple formularies, these pharmacists and prescribers must prescribe and dispense medications that are based on the structure of each of the unique formularies that exist which creates extensive administrative burden for providers.

Statewide formularies are a not so recent trend that has come to the forefront of the formulary debate. According to Lubin and colleagues (2005), responses obtained from EMS agencies in all 50 states regarding prehospital medication polices and statewide EMS medication formulary showed that there was a trend towards stricter control and less variations between statewide formularies. Prior to this study, researchers found a trend toward using more of the “most commonly” listed medications (6.9% in 1992 versus 22.1 in 2002).These results demonstrate a movement towards more uniform and state control over medication formularies.

Statewide Formulary in Action

According to a 2002 Bureau of State Audit Review, agencies that frequently purchase drugs have experienced increase of about 34 percent in drug costs from 1996 to 2001. State agencies annually purchase an estimated $4.2 billion in prescription and nonprescription drugs and the growth of drug cases has surpassed every other category of health expenditures.

Like many states, California has experienced a growth in prescription drug costs. In an effort to contain rising costs, California created a Statewide Pharmaceutical Program: Common Drug Formulary that is designed to provide high quality and best value pharmaceutical products while ensuring the standardization of medication care and cost for those who participate in the program. The program was administered by the California Department of General Services, Pharmaceutical Acquisitions Section allowing for state and local government entities to contract for pharmaceutical products and medical/surgical supplies jointly. The program is designed to not only control costs but also to ensure that patients are being provided with appropriate, proven drug therapies.

The use of a single formulary that exists across many states can allow for the use of one set of drug utilization management rules and procedures. The single formulary design can provide a single point of contact that would remove some of the disadvantages that can be experienced by pharmacists, prescribers, and patients.

However, while the use of the single formulary can allow for plan administrators to take advantage of manufacturer discounts and rebates which pharmacies can promote to their customers, it can also mean forgoing significant cost savings that can come from negotiating contracts with pharmacy benefit managers. To balance this potential loss of savings within a single formulary structure, there is the potential for costs to be passed on to patients in the form of higher patient-cost share or premiums.

Plan methodology and cost control outcomes furthers the debate regarding uniform formulary management. A recent study provided by the Mendes Group for the state of Texas suggested a formulary management model where each managed care organization (MCO) managed their own PDL would yield significant savings. The report states that “for every four days that the uniform PDL policy remains in effect, we estimate over $1 million in excess costs are borne by Texas taxpayers.” The savings would be in result of a strategy focused on maximized rebate and managed drug mix in the most cost-effective manner.


With their ability to guide consistent prescribing habits and balance cost-saving measures with clinical rigor, statewide formularies are making a significant impact on the healthcare industry. Regardless of whether there is a statewide formulary that all participants must adhere to or a multi-payer environment that may require the presence of multiple formularies within a state-sponsored health plan (such as Medicaid, CHIP, or Exchange plans), the decision ultimately lies with what works best for patients. The ability to have access to cost effective medications is of great importance for patients that rely on them from day to day.




Haiden, A, Epstein A, & Blumenthal, D. The impact of a national prescription drug formulary on prices, market share, and spending: Lessons for medicare?  Health Aff May 2003 vol. 22 no. 3 149-158

US Department of Health & Human Services Office of the Assistant Secretary for Planning and Evaluation. “Observations on Trends in Prescription Drug Spending.” March 2016. Accessed August 18, 2016.

Rockoff, Johnathan. “How Do We Deal With Rising Drug Costs?” The Wall Street Journal, March 8, 2016, accessed June 9, 2016,

Jonathan D. Alpern, M.D., William M. Stauffer, M.D., M.S.P.H., and Aaron S. Kesselheim, M.D., J.D., M.P.H. “High-Cost Generic Drugs: Implications for Patients and Policymakers” New England Journal of Medicine. November 13, 2014. Accessed August 30, 2016

Woodhouse, KW. “Drug Formularies—good or evil? A clinical Perspective.” Cardiology.  1994. Accessed September 6, 2016.

Legislative Analyst’s Office. Lowering the state’s costs for prescription drugs. Available at  Retrieved Augustt 1, 2016.

Loner, V, Hogue, N, & Egelhof, J. Single formulary and electronic prior authorization recommendations. Available at Retrieved July 19, 2016.

Louisiana Department of Health (2016). Community and Preventive Health. Available at Retrieved July 19, 2016.

Lubin, JS, Delbrige, TR, Rinnert, KJ, & Platt, TE. Evolution of statewide EMS drug formularies and regulations.  See comment in PubMed Commons belowPrehosp Emerg Care. 2005 Apr-Jun;9(2):176-80.

Shirneshan E., et al. (2016). Impact of a transition to more restrictive drug formulary on therapy discontinuation and medication adherence. J Clin Pharm Ther.;41(1):64-9. doi: 10.1111/jcpt.12349

State of California (2016). Statewide pharmaceutical program: Common drug formulary. Available at  Retrieved July 19, 2016.

The Mendes Group. “Assessment of Medicaid MCO Preferred Drug List Management Impacts.” February 2016. Accessed August 2016.

Schiff GD, Galanter WL, Duhug H, et al.  A prescription for improving drug formulary decision making.  PLoS Medicine 2012: 9(5).






Topics: patient outcomes,, drug costs,, formulary,

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