Pharmacy Benefit Manager Formularies: Friend or Foe?


Understanding how formularies work is essential in the world of pharmacy and knowledge on this topic can help pharmacists to better serve patients.

The goal of a pharmacy benefit manager (PBM) is to help plan sponsors create a prescription drug benefit that meets the needs of plan members both clinically and financially. One of the tools that the PBM has is a drug formulary, which is a list of medications that are covered by a prescription drug plan or hospital. The list is supported by evidence-based medicine as well as the judgment of the pharmacy and therapeutics (P&T) committee.

The P&T committee is an independent entity that is comprised of anywhere from 10 to 15 members. The committee is primarily made up of physicians and pharmacists, but can also include nurses, administrators, legal experts, and economists.

The P&T committee develops, manages, and updates the formulary for the PBM, as well as developing policies to ensure safe and effective drug use.

They also inform health care providers about products and their decisions, provide clinical oversight, and monitor the drug pipeline. Due to all of these factors, the committee meets no less than every quarter to discuss and review any drug market changes.

What goes into developing a formulary?

First, there are two types of formularies: open and closed. Open formularies typically cover all medications, which allows the patient the greatest access. This also comes at the highest cost for the plan sponsor.

Whereas, closed formularies do not cover all medications. This type covers most drugs, but restricts the choice (through drug exclusions) that the patient and provider have. Although every therapeutic class will have treatment options available, not all medications will be covered.

In some closed arrangements, a generic first approach may be employed—only covering generics with very select brand name medications. Overall, closed formulary offerings provide any given client the most flexibility to balance costs verse member disruption.

The next piece of the puzzle is the formulary tier design, which typically have three tiers as the most common setup. Some, however, may have extra tiers to afford clients additional cost control options. With specialty costs continually increasing, plan sponsors are beginning to explore the use of a four- or five-tier approach to better help manage these costs.

  • Tier 1: Generic medications (this does not include all generic medications)
  • Tier 2: Preferred brand medications
  • Tier 3: Non-preferred brand medications
  • Tier 4 (if applicable): Specialty or high-cost tier

Formulary tiering often helps determine co-pay pricing as well. Tier 1 will have the lowest co-pays and will increase as the tier gets higher. This provides the incentive to use the preferred generics in tier 1 or preferred brands in tier 2.

Formularies can also include utilization management (UM) to control cost if necessary. There are three main types of UM:

  • Prior authorization: Requires the prescriber to obtain pre-approval from the PBM before the medication can be dispensed.
  • Quantity limits: Sets a limit for a given medication that the plan sponsor will allow to fill in a certain amount of time.
  • Step therapy: Patient must try and fail a series of medications before the more expensive medication is approved.

How to determine what medications are included?

  • Formulary design begins at the therapeutic class level and moves into subclasses and drug classes if applicable.
  • Safety and efficacy are compared between medications with the same indication and therapeutic action.
  • If all things clinical are equal, cost becomes the tiebreaker.

It is important to note that safety and efficacy are the first priority. Cost is not the driving factor when determining which medications are put on the formulary. If there is a choice between two medications where one is very cheap and one is very expensive, but the cheaper medication has severe adverse effects, the more expensive medication will be chosen every time. The safety and efficacy will always come first.


Understanding how formularies work is essential in the world of pharmacy. Every pharmacist should have some knowledge on this topic to better serve our patients. As a retail pharmacist, I have had far too many conversations with patients regarding formularies.

This often happened when a patient changed prescription drug plans and failed to review the new plan’s formulary. Each plan’s formulary is different and that should be no surprise to anyone.

To the patients

When you select your prescription drug coverage plan, be sure to know where to find the formulary. I’m not suggesting to memorize it because that is impossible. Be familiar with where it is. Use it when your physician writes for a prescription. This will give you the knowledge and preparation needed when you head to the pharmacy.

You will have a good estimate for what your prescription may cost ahead of time and being prepared like this will make your life easier when it comes to the world of pharmacy.

About the Author

Ryan Fitzmaurice earned his Doctor of Pharmacy degree from Lake Erie College of Osteopathic Medicine (LECOM) School of Pharmacy and earned his Masters of Pharmacy Business Administration (MPBA) program at the University of Pittsburgh, a 12-month, executive-style graduate education program designed for working professionals striving to be tomorrow’s leaders in the business of medicines. He has spent the past several years working across the industry including retail pharmacy management, specialty pharmacy, and 340B pharmacy.

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