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?
A drug formulary is a continually updated list of prescription medications that are covered under a pharmacy benefit. Formularies are developed and administered by PBMs on behalf of plan sponsors and health plans, with the goal of balancing clinical effectiveness, safety, and financial considerations.
A drug formulary list typically includes both branded and generic drugs that have been evaluated and recommended to the PBM by a multidisciplinary Pharmacy and Therapeutics (P&T) committee. These are responsible for reviewing and updating the formulary to reflect the most current clinical guidelines, FDA-approved prescribing protocols, published medical literature, and updated latest clinical trial evidence.
Drug formularies shape what members are prescribed and use: on‑formulary drugs are typically covered with lower member cost sharing, while off‑formulary drugs usually require an approved exception or prior authorization, steering patients to lower‑cost alternatives.
The PBM’s final formulary reflects clinical considerations as well as the outcomes of PBM negotiations with pharmaceutical manufacturers and pharmacies. By aggregating purchasing power across multiple clients, PBMs seek to influence pricing, secure discounts or rebates, and reduce overall drug spend while maintaining appropriate access to necessary therapies.
How does a drug formulary work?
Prescription drug coverage and member cost-sharing under a pharmacy benefit are largely determined by the formulary structure administered by the PBM on behalf of the payer. The drug formulary defines which medications are covered, how they are covered, and relative cost to the plan and members. Coverage and cost outcomes are also influenced by formulary design choices, such as whether the formulary is open or closed, as well as by broader formulary management tools, including tier placement and utilization management requirements (e.g., prior authorizations, quantity limits).
Open Formulary
An open formulary generally provides coverage for a broader range of prescription medications, with fewer outright exclusions. This design offers healthcare providers and patients greater flexibility in selecting treatment, though at varying cost-sharing levels.
While open formularies emphasize access and choice, they do not eliminate all utilization management. Drugs may still be subject to higher tiers, prior authorization, step therapy, or higher member cost sharing. However, because fewer drugs are excluded, open formularies typically result in higher overall plan costs, as members have access to a wider selection of higher-cost medications and fewer incentives to shift to lower cost, preferred alternatives.
Closed Formulary
A closed formulary limits coverage to a defined list of approved medications; drugs not included are generally not reimbursed unless an exception is granted when medically appropriate. By concentrating utilization on preferred products, closed formularies strengthen manufacturer negotiations and can lower net costs through discounts and rebates, helping plan sponsors rein in pharmacy spend while maintaining access to clinically appropriate therapies.
Formulary Ranking & Drug Formulary Tiers
Drug formularies are organized into value-based classifications, known as tiers, which determine the level of coverage and amount of member cost sharing. Drugs placed in lower tiers (most commonly generic drugs) typically have lower patient out-of-pocket costs and are considered the most preferred options within the formulary. Drugs in higher tiers (typically non-preferred brand name and specialty drugs) have the highest patient out-of-pocket costs.
Tiered formularies help payers and PBMs manage pharmacy costs by lowering cost sharing for lower-priced or preferred drugs, steering use toward cost-effective options unless higher-cost alternatives are clinically necessary.
Formulary Management Policies
Formulary management strategies are similar across the PBM industry. PBMs offers employers a range of formulary options built around predefined strategies developed by the PBM. While plan sponsors may elect to adopt a PBM’s standard formulary designs, it’s also possible to create custom formularies.
Within pharmacy benefits plans, several formulary management policies may be leveraged control costs and promote appropriate medication use, including:
- Utilization management tools, such as prior authorizations and step therapy requirements, which require the use of lower-tier drugs before more expensive alternatives.
- Clinical evaluation, prescribing guidelines, and decision support used to assess medical literature and treatment standards, guide medication selection for specific populations, and promote high-quality, evidence-based, affordable care.
- Policies and procedures governing medication procurement, dispensing, and utilization, designed to ensure appropriate and efficient use of medications.
Choosing the right prescription drug program can be challenging because PBMs frequently update formularies – adding new drugs, restricting or excluding others based on contracting and market changes, and adjusting tier placement. As a result, coverage, cost sharing, and formulary rules can shift over time.
Keeping up to date on drug formulary
Understanding formulary options can help bridge the information gap 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.
