How Expensive Prescription Drugs Make it to the PBM Formulary

This is part three in a series on drug formularies. Check out part one and part two.

As plan sponsors and their members continue to see their prescription drug costs rise, we’re frequently asked how high-cost medications make it to the approved drug list (or formulary), especially when lower-cost medications are already available in the market. A key to understanding this complex dynamic is to understand how the Food and Drug Administration (FDA) approves new drugs and how PBMs create their formularies. These two separate but related processes impact which drugs are accessible to members – and ultimately the high drug costs many self-funded employers incur.

FDA New Drug Approval Process

When a drug manufacturer wants to bring a new product to the market, they submit a new drug application to the FDA. The FDA will then evaluate results of clinical trials for clinical efficacy and safety.  The FDA also classifies drugs into certain distinctions, such as orphan drug or fast-track approval, which dictate the drug’s position in the market. The drug application will be approved, denied, or sent back for more research and clinical trials.

An important note is that the FDA approval is based on the drug being effective a minimum of 15% of the time. The FDA also does not take into account the drug’s cost when making decisions. After the FDA has given the green light to the manufacturer, they set the price and begin to ramp up production of the product to get it out into the market.

PBM Formulary Selection Process

Each PBM has its own drug formulary, or list of approved drugs, that it maintains for clients. The PBM formulary selection process happens after the FDA approval process and is carried out by the PBM’s Pharmacy and Therapeutics (P&T) Committee, which is comprised of independent clinicians. The P&T Committee determines what drugs are on the PBM’s formularies, adding and removing drugs as new products come to market. They also determine whether that drug will be subject to utilization management, such as step therapy, quantity limits, or prior authorization. After those steps are taken, the PBM’s pharmacy relations team steps in to negotiate pricing and rebates with the drug manufacturer, which further impacts the drug’s position on the PBM formulary.

Clinical Efficacy and Safety Before Pricing

Both the FDA’s new drug approval process and the PBM’s formulary selection process emphasize clinical effectiveness and patient safety over pricing. However, the PBM’s pricing and rebate negotiations play a critical role in a drug’s placement on the PBM formulary – and ultimately the costs paid by clients and members. With the PBM in control, payers are often left out of the process while expensive, yet highly rebateable, drugs are placed in preferred positions on the PBM formulary. This is how plan sponsors and members get stuck paying more than is necessary for high-cost, low clinical value prescription drugs when there are lower-cost, clinically appropriate alternatives available. With an independent formulary management strategy in place, you can take control of pharmacy spending while still providing members access to clinically effective medications.