How Expensive Prescription Drugs Make it to the PBM Formulary

Top 3 Things You’ll Learn

  1. How the FDA approves new drugs to the market
  2. How PBMs select drugs for their formularies
  3. Why the PBM formulary includes high-cost, low clinical value drugs

This is part one of a series on drug formularies. Check out part 2 and part 3.

As plan sponsors and their members continue to see their prescription drug costs rise, I’m 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 pharmacy benefit managers (PBMs) create their formularies. These two separate but related processes impact which drugs are accessible to members – and ultimately the high prescription drug costs self-funded employers incur.

FDA New Drug Approval Process

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

FDA new drug approvals are based drugs being effective 15% of the time, while PBMs negotiate pricing and rebates with manufacturers. Left out of the equation are payers, who get stuck paying more than is necessary on high-cost, low clinical value medications.

PBM Formulary Selection Process

Each PBM has their own drug formulary, or list of approved drugs, that they maintain for their clients. The PBM formulary selection process happens after the FDA approval process and is carried out using 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, by meeting regularly to review the efficacy and safety of individual drugs, adding and removing drugs as new products come to market. They also determine whether that drug will be subject to utilization management edits, 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 overpricing. 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 plan sponsors and members. With the PBM in control, payers are left out of the equation 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 help your employer clients take control of their pharmacy spending while still providing their members with access to clinically effective medications.

Check out our free Clinical Strategies Playbook to learn best practices to help your clients optimize the PBM formulary and lower their prescription drug costs.

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