Formulary Management: How it Works

Formulary management is a crucial strategy in maintaining an affordable and effective pharmacy benefit. The formulary, whether open or restrictive and tightly managed, has the power to greatly impact an employer’s bottom line. To further explain, we have put together a list of frequently asked questions along with the answers to provide more detail.

Q: What is a formulary?
A: A formulary is a list of preferred drugs that offers the greatest overall value, both clinically and financially.

Q: How are formularies built?
A: A formulary is created by a Pharmacy & Therapeutics (P&T) committee of independent physicians, nurse practitioners, and pharmacists who review drugs by category for their clinical effectiveness. During the complex process of finalizing a formulary, the P&T committee considers the clinical appropriateness of the drug. When two or more drugs produce similar clinical results, other factors are considered such as utilization trends, brand and generic pipeline, financial implications on plan sponsor costs, and the impact on members.

Regardless of formulary content, it is important to note that the prescribing physician will make the final decision regarding an individual patient’s drug therapy.

Q: What makes a formulary effective?
A: An effective formulary provides access to clinically superior medications by eliminating medications that have no added clinical benefit or have higher costs. In response, drug manufacturers are pressured to charge more competitive prices for their medications and offer rebates. By altering the dynamic of drug competition, formulary management has the potential to save plan sponsors millions of dollars. Without a properly managed formulary, plan sponsors may pay considerably more for medications, resulting in higher cost sharing and a reduced benefit for members.

Q: Do tightly managed formulary strategies really work?
A: Yes. Pharma manufacturers will provide deeper discounts and/or rebates when their drug is included in a formulary and their competitors are excluded. Therefore, when selecting which drugs to include in their formulary for certain conditions, PBMs will often restrict their choice to one drug from one manufacturer to leverage the better discount/rebate.

Q: Does every PBM use a similar strategy when building their formulary?
A: No. Some PBMs build their formularies to maximize rebates while others build them to provide lowest net cost. Since many consultants evaluate PBMs by AWP discounts and rebates alone, some PBMs use the strategy of providing higher cost drugs with larger rebates to appear more competitive. However, this is not always the case. In the example below, based only on the brand discount and average rebate, it appears PBM A is offering the best deal with the highest discount and rebate at first glance. However, when the cost of the specific drug for this therapeutic class is factored in, PBM B proves to be offering the lowest net cost based on the drug chosen for their formulary.









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Tightly managed formularies counter drug makers’ tactics that increase pharmacy costs. Implementing formulary strategies and removing even a small number of medications from the formulary puts the employer in control. MMA Rx Solutions works to reduce prescription drug costs without compromising clinical excellence through formulary strategies.