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 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.

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. 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 tend to save more when pharmacy reimbursements and dispensing fees are negotiated by PBMs or Medicaid Managed Care Organizations (MCOs) rather than set by state governments. States also save more when they resist “one-size-fits-all” formularies and instead allow PBMs and Medicaid MCOs to devise and actively manage formularies for vulnerable populations.

States that have used Medicaid managed care as a tool to actively manage Medicaid pharmacy benefits have proven that states can save money without compromising quality or access to medications for the unique and vulnerable populations that Medicaid serves. However, widely varying payment levels—and per member per month (PMPM) costs—among state Medicaid fee-for-service programs suggest that there is substantial room for improvement in the Medicaid program.

Optimizing pharmacy benefit management tools and strategies in state Medicaid programs nationwide could save a total of $74.4 billion over 10 years, including $43 billion in federal savings and $31.4 billion in state savings.

Visit the What is a formulary? card stack in the Knowledge Center to learn more.


White Paper: The Management of Specialty Drugs, sPCMA, February 2016

Research: Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates, PCMA