The Employer's Guide Blog for Overseeing PBMs

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The Makings of a Good Drug Formulary

A formulary is a list of drugs favored by the PBM for their clinical effectiveness and cost savings. Pharmaceutical manufacturers of specialty and branded drugs often promise financial incentives to have their drugs featured on the formulary. Drug formularies can be open, incented, or closed.

  • An open formulary is a list of recommended drugs. Under this structure, most drugs are reimbursed irrespective of formulary status. However, the client’s plan design may exclude certain drugs (e.g., OTC, cosmetic and lifestyle drugs). Physicians, pharmacists, and members are encouraged by PBMs via mailings, electronic messaging, and other means to prescribe and dispense formulary drugs.
  • An incented formulary applies differential co-pays or other financial incentives to influence patients to use, pharmacists to dispense, and physicians to write prescriptions for formulary products.
  • A closed formulary limits reimbursement to those drugs listed on the formulary. Non-formulary drugs are reimbursed if the drugs are determined to be medically necessary, and the member has received prior authorization.

In general, self-insured employers and insurance carriers outsource both administrative and clinical services to a PBM. Managed care organizations (MCOs) and some insurers may elect to retain formulary and clinical control, including manufacturer contracting, and outsource only administrative services such as claims processing and benefit administration to a PBM.

There are five factors necessary for a drug formulary to work effectively. These include: 

Example of a tiered formulary (click to enlarge) 
1. An enforcement mechanism
2. A specific (tiered) list of drugs
3. Understanding how the drugs are assessed
4. A firm dispute resolution process
5. An expedited appeal process
An enforcement mechanism is particularly important. Certain drugs require prior authorization before they are covered under the drug benefit. Prior authorization is the pre-approval of a drug by the PBM before a pharmacy can dispense it.
Currently, prior authorization of prescriptions is used only for a few chosen drugs. These are drugs that are very expensive and have major off-label uses not approved by the FDA, such as growth hormones, or drugs that require medical justification before coverage is approved, such as Viagra or Cox-2 Inhibitors.
Before authorizing dispensing of one of these drugs, the PBM may ask the physician about diagnostic tests, symptoms, and other clinical measures that would establish the appropriateness of the drug according to evidence-based protocols. If the physician can’t produce the evidence it is unlikely the PBM will reimburse the pharmacy for dispensing the drug.
In addition, PBMs use co-pays as a mechanism to shift some responsibility of utilization to the member by making them sensitive to the cost of their utilization. Co-pays are also used to provide incentives to encourage the use of generics or formulary drugs.
There needs to be consensus among stakeholders involved in constructing a drug formulary. The biggest contributor to success is that all stakeholders in the system are part of the process. If the formulary is developed solely by the PBM, without any input from the payer, it’s unlikely the payer will fully benefit from the improved patient outcomes and cost-containment opportunities a formulary exists to deliver.

Sources:  PwC Study of Pharmaceutical Benefit Management 

Tyrone Squires, MBA, CPBS

I am the proud founder and managing director of TransparentRx, a fiduciary-model PBM based in Las Vegas, Nevada. We help health plan sponsors reduce pharmacy spend, by as much as 50%, without cutting benefits or shifting costs to employees.

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