With the rising cost of prescription medications, the volume of new drugs coming into the market, and wide variations in the way that pharmacy benefit managers (PBMs) determine coverage, it is becoming increasingly important for employers to understand how their drug formularies are structured within pharmacy benefit plans.
What is a drug formulary?
In essence, a drug formulary is a continually updated list of ‘covered’ prescription medications that PBMs develop to balance clinical effectiveness with financial considerations.
A formulary drug list will include branded and generic drugs that have been recommended to the PBM by a multidisciplinary Pharmacy and Therapeutics (P&T) committee of physicians, pharmacists, and other healthcare professionals. The P&T committee is responsible for developing, reviewing, and updating the formulary list so that it reflects the most current clinical guidelines, FDA-approved prescribing protocols, published literature, and most updated clinical trial results.
Drug formularies hold significant power in determining which drugs members are prescribed and ultimately fill and take. This is because when a drug is ‘on’ formulary, the drug costs are covered entirely or partially by insurance, while ‘off’ formulary drugs are most often not covered by insurance. Therefore, payers, providers, and pharmacists aim to provide patients with the more affordable on-formulary drugs available.
The PBM’s final formulary list reflects the outcomes of PBM efforts to aggregate purchasing power and lower the drug costs through negotiations with pharmaceutical manufacturers and pharmacies.
How does a drug formulary work?
The prescription drug coverage and benefits provided by a PBM, along with the associated costs for payers and members, are determined by the formulary structure. Furthermore, there are other factors that play a role in the cost share and coverage, such as whether you choose an open or closed formulary, and overall formulary management policies.
Open Formulary
An open formulary provides coverage for a wide range of prescription medications, without restrictions on coverage, allowing healthcare providers and patients greater flexibility in terms of treatment. The primary feature of an open formulary is its emphasis on providing members with freedom of choice, which predictably comes with higher costs to the plan. Members have access to a wider selection of medications, which allows them to have alternative options if their initial drug did not work as effectively as expected. The member also does not need to go through several steps to receive their medications (ex: prior authorization, step therapy, etc.). Consequentially, open formularies are significantly more expensive for the employer, as members are not restricted to which drugs they can get.
Closed Formulary
A closed formulary limits patient coverage to a specific list of approved medications. This approach allows PBMs to exert more control over the costs by negotiating discounts and preferred pricing with different manufacturers. A closed formulary is one in which non-formulary drugs (both branded and generic) are not typically reimbursed by the payer. Formulary exception policies allow providers and patients to request coverage for non-formulary medications when medically appropriate.
Shifting from an open to closed formulary generally has cost savings implications for payers, and can be a way for plan sponsors to reign in pharmacy spend.
Formulary Ranking & Drug Formulary Tiers
Formularies also rank groups of drugs into value-based classifications, or tiers, that determine the level of coverage that the health plan will provide. Drugs in the lowest tier (usually generic drugs) have the smallest patient cost-sharing and are most preferred by the formulary, and those in the top tier (typically brand name and specialty drugs) have the highest patient out-of-pocket costs. The tiering system helps insurers and pharmacy benefit managers (PBMs) manage costs by encouraging the use of lower-cost medications (low-tier drugs) over higher-cost alternatives (high-tier drugs).
Formulary Management Policies
Formulary management strategies are quite similar across the PBM industry. Each PBM offers various options for employers based on the formulary they select. Typically, these formularies come with established preset strategies developed by the PBM that are based on medical literature, current guidelines, and other factors. While it is possible to create custom formularies, this option is significantly more expensive for employers and impacts several areas, including cost, guarantees, and rebates.
Within pharmacy benefits plans, there are multiple formulary management policies that can be leveraged to contain costs and control quality, including:
- Drug benefit caps, prior authorizations, and step therapy requirements, which dictate that lower-cost, lower-tier drugs must be prescribed before more expensive alternatives.
- Methodologies for evaluating clinical and medical literature to guide the selection of medications for different diseases, conditions, and patients.
- Policies and procedures for the procuring, dispensing, administering, and appropriately utilizing medications.
- Prescribing guidelines and clinical information designed to promote high-quality, affordable care for patients.
The challenge of choosing the optimal prescription drug program for a given organization is further exacerbated by the fact that PBMs frequently update and revise their lists of formulary drugs vs non-formulary drugs. This means the PBM updates the drug formulary list to add newly approved drugs, include or exclude existing drugs based on contracts with manufacturers, and reevaluate tier placement.
Keeping up to date on drug formulary
Understanding formulary options can help bridge the information gap that currently exists in the pharmacy benefits ecosystem. By evaluating various PBMs in an independent marketplace, you can assess and compare different formulary options and strategies.
Monitoring the performance of your pharmacy program can provide you with detailed insights into how formulary strategies are performing and how members are adhering to their formulary.
As in all situations, information is power when it comes to choosing the right formulary and PBM partner. Arming yourself with a thorough and accurate appraisal of the available options with regards to drugs formulary is the key to building a strong PBM partnership and meeting cost and clinical objectives.
Contact Truveris pharmacy contract experts today to discuss any questions you might have regarding drug formulary policies and their impact to your pharmacy program.
Truveris is a leading digital health company focused on delivering truth and clarity in pharmacy. Truveris’ proprietary technology, coupled with deep pharmacy expertise, helps to build a more efficient market that maximizes choice, accessibility, and prescription drug affordability. Our solutions provide the insight and knowledge to help people lead healthier and more productive lives.
