What is a drug formulary and how does it affect employer costs?

A drug formulary is the list of covered prescription drugs organized into tiers that determine patient cost-sharing. PBMs design formularies partly based on which manufacturers pay the highest rebates, which may not align with the lowest net cost for employers. Employers can negotiate formulary design rights to prioritize cost-effective generics and biosimilars over higher-cost branded drugs.

What is prior authorization in pharmacy benefits?

Prior authorization (PA) requires prescribers to obtain approval before a drug is covered, typically for high-cost specialty drugs, drugs with preferred alternatives, or drugs with abuse potential. Well-designed PA programs reduce unnecessary high-cost drug utilization, but overly aggressive PA can create barriers to appropriate care. Employers should review PA approval rates and denial reasons annually.

What is step therapy and when should employers use it?

Step therapy requires patients to try lower-cost medications before a higher-cost drug is covered. For example, a patient might need to try a generic antidepressant before a branded drug is approved. Step therapy is most effective for therapeutic classes with multiple clinically equivalent options at different price points, such as statins, proton pump inhibitors, and certain biologics.

What are formulary exclusions and how do they save money?

Formulary exclusions remove high-cost branded drugs with generic or biosimilar equivalents from coverage entirely, forcing use of the lower-cost alternative. Major PBMs have exclusion lists that remove 100–200 branded drugs annually. Employers can adopt these exclusion lists or customize them, typically saving 3–8% on total pharmacy costs without meaningful clinical impact.

How can employers get more control over their formulary?

Employers can negotiate formulary design rights in their PBM contract, including the ability to add or remove drugs, adjust tier placement, and customize prior authorization criteria. Transparent PBMs typically offer greater formulary flexibility than traditional PBMs. Employers should also request annual formulary performance reports showing generic dispensing rates, PA approval rates, and therapeutic substitution rates.

Formulary

Formulary Management for Self-Funded Employers

Your formulary — the list of covered drugs and their cost-sharing tiers — is one of the most powerful cost-management tools in your pharmacy benefit. Employers with self-funded plans can customize their formulary; most don't take full advantage of this flexibility.

Formulary management levers

Tiering: Place lower-cost generics and preferred brands on lower tiers (lower cost-sharing) and higher-cost brands on higher tiers. Proper tiering drives generic utilization and reduces costs.

Prior authorization: Require clinical review before covering high-cost drugs, ensuring they're used only when clinically appropriate.

Step therapy: Require members to try lower-cost alternatives before covering a higher-cost drug. Effective for conditions with multiple treatment options.

Quantity limits: Limit the quantity dispensed per fill to clinically appropriate amounts, reducing waste.

Exclusions: Exclude drugs with no clinical advantage over lower-cost alternatives — lifestyle drugs, high-cost brands with generic equivalents, etc.

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