What is a formulary?
What's a formulary?
Among the most important tools used by PBMs to manage specialty drug costs are drug formularies. A formulary is a continually updated list of prescription drugs approved for reimbursement by the PBM’s payer client. PBMs typically develop a basic formulary and offer it to payers, who may customize it.
It is ultimately up to the payer client to decide on the exact formulary that will be used in conjunction with its benefits plan, as well as the techniques that will be applied to encourage formulary compliance.
Some clients may prefer broad unrestricted access to all medications and therefore are willing to accept higher costs to afford that access. Other clients may be very concerned with containing drug costs and will opt for tight formularies and more aggressive techniques to achieve compliance.
Effective use of formularies can minimize overall medical costs, improve patient access to more affordable care, and provide patients an improved quality of life.
Formulary development is an integrated patient care process enabling physicians, pharmacists, and other health care professionals to work together to promote clinically sound, cost-effective medication therapy, and positive therapeutic outcomes.
The primary consideration in the development of a formulary is clinical appropriateness: what is the most appropriate therapy for a given disease or condition? PBMs use panels of experts called Pharmacy and Therapeutics (P&T) Committees to determine the most clinically appropriate drugs for a given drug class and indication.
These committees are made up of physicians, pharmacists, and individuals with other appropriate clinical expertise. Thus, PBMs design their formularies based on P&T Committee recommendations and factor in a number of cost-saving elements, such as biosimilar availability and negotiated rebates.
Payers can adopt PBM-developed formularies or use them as the foundation for their own custom formularies, which are governed by their own P&T Committees. This allows plan sponsors to build a formulary that best meets the needs of their patient community within their healthcare budget.
Formulary controls also vary by benefit design. There are many types of formularies on the market, but they usually fall into three basic types:
- Open formulary: The plan sponsor pays a portion of the cost for all drugs, regardless of formulary status. Although, a plan sponsor may choose to exclude certain products, such as ‘lifestyle’ drugs, from coverage.
- Closed formulary: The plan sponsor will only cover drugs listed on the formulary. Non-formulary drugs are not covered unless approved through a formulary override process.
- Tiered formulary: Plan sponsors offer different copays or other financial incentives to encourage participants to use preferred formulary drugs, but will still pay a portion of the cost of the non-preferred drug. For example, when a plan sponsor offers a three-tier benefit design, it may cover non-preferred, non-formulary products on its third tier with a higher copay.
Development and maintenance of formularies is an ongoing activity, as they must be constantly updated to keep pace with new therapies, recent evidence from clinical research, changes in medical practice, and FDA guidance. Most PBMs update their formularies quarterly.
P&T committees review medications from a purely clinical perspective – they do not consider the price of a therapy in their decisions. These committees analyze a broad range of topics, including new drug evaluations, new FDA-approved indications for existing drugs, new clinical line extensions, and new published or clinical practice trends that may impact previous formulary placement decisions.
Through prior-authorization (PA) processes, formularies also allow physicians and patients to access non-formulary drugs when the medication is medically necessary and/or likely to create the best outcomes. Since these medications have been evaluated systematically, formularies ensure the use of safe and effective drugs.
In cases where a specific non-formulary or non-preferred drug is the clinically appropriate medication for an individual, drug benefit plans have an appeals mechanism in place. Patients whose appeals are successful can obtain benefits for the non-preferred product as if it had preferred status on the formulary.
Managing Drug Costs
Effective use of formularies can minimize overall medical costs, improve patient access to more affordable care, and provide patients an improved quality of life. With less effective, higher-cost drugs routinely being replaced on formularies by more effective and affordable drugs, patients may have fewer office visits, improved outcomes, and lower out-of-pocket costs.
An effective formulary strategy, used in concert with other cost mitigation programs, can yield significant savings for plan sponsors and patients, while still preserving access to medication. In cases where more than one product has been determined to be therapeutically equivalent, PBMs may use the leverage provided by formulary placement in negotiations with drug manufacturers. Generally, the therapeutically equivalent drug that provides the best value for clients will be given preferred status on a formulary.
PBMs will use a variety of techniques to encourage use of the preferred formulary drugs. The most effective tool for achieving formulary compliance is through benefit structure or plan design where preferred drugs have lower enrollee cost-sharing.
Resources & References
- Pharmacy Benefit Managers (PBMs): Tools for Managing Drug Benefit Costs, Quality, and Safety. Health Policy Alternatives. 2003.
- How we build a formulary. Express Scripts. 2015.
- White Paper: The Management of Specialty Drugs. sPCMA. February 2016.