Top 3 Things You’ll Learn
- How to choose the right formulary
- The differences between formulary types
- How utilization management complements a well-selected formulary
Formulary selection is an essential building block for self-funded employer clients creating a prescription drug program. As a benefit advisor, knowing the types of formularies and where they best fit will help you get the best clinical and economic outcomes for plan sponsors and members.
As we shared in part 1, a formulary is a list of preferred drugs designed to influence which drug products get prescribed and used by members – ideally, those that are the safest, medically appropriate, and most cost-effective. An effective formulary meets the goals and needs of members and employers — who are paying the bulk of the pharmacy costs.
Utilization management tools, such as prior authorization, step therapy rules, and quantity limits, ensure members have access to the right medications at the best prices. Since copayment is linked to the formulary tier of a product, a plan sponsor can select formularies tiers and adjust the copayments to balance member satisfaction with cost savings.
In the second part of our formulary series, we’ll share the different types of formularies, how utilization management factors into formulary success, and tips for helping your client build the best formulary for their plan.
What are the different types of formularies?
There are several models for building a pharmacy formulary. Whether drug list decisions are focused on maximizing rebates, finding the lowest net cost, or member outcomes, the key is to find the right fit aligned with each client’s goals.
1. Open formularies provide coverage for all prescription medications, with some potential exceptions for over-the-counter and cosmetic medications. These formularies are more prescriber and member friendly as they allow for the greatest freedom of choice in therapy. However, they also have the lowest rebates and highest costs to the payer.
2. Rebates-based models influence a drug’s position on the formulary. Some of the earliest types of managed pharmacy formularies feature relatively simple models where pharmaceutical manufacturers negotiate the position of their drugs on the formulary by offering rebates to plan sponsors. The plan sponsor is then incentivized to promote the use of the products that offer the highest rebate. Most formularies currently in the marketplace are variations on this theme.
- Access-based rebate models feature rebates based on a percentage of the drug cost, reimbursed to the payer for each claim processed. The rebate rates improve when fewer products are allowed on the formulary within a given market basket. (A market basket is a group of drugs competing with one another within the formulary.) Variations on this theme include higher rebates if there are no utilization management restrictions, such as prior authorization or step therapy, or if a drug is assigned a preferred designation offering a lower member copay.
- Market share models determine the rebate amount from the market share achieved within the drug’s market basket. For example, a product with a 50% market share in its market basket might earn higher rebates, than it would earn if it only had 25% of the market share — these thresholds are specified in the contract.
3. Lowest net cost formularies prefer treatments with the lowest net cost. These formularies consider the cost of the drug minus rebates instead of preferring those with higher rebate yields and higher net cost. Preferring products with the lowest net cost may seem like an obvious choice, but when the pharmacy benefit manager managing the formulary retains a portion of the rebates, there may be an incentive to prefer higher-rebate products.
4. Outcomes-based formularies use medication performance to determine rebates. Typically, there will be a focus on specific indications and drugs within these formularies. To suit this type of formulary, drugs must work quickly and create easy-to-measure outcomes. Outcomes-based formularies can be complex, and no single approach has emerged as the winner for employers.
- Value-based formularies reimburse a portion of the cost on a member-by-member basis when a patient took the drug but didn’t achieve the agreed-upon outcome. Not many PBMs or payers pursue these agreements. Hurdles arise when it comes to defining and measuring the right outcomes for each drug. This is particularly problematic when the desired outcome of a drug is to prevent a condition that may not occur anyway, such as a heart attack in a person who was taking a drug to control high cholesterol. In addition to those challenges, getting an agreement between the payer and the pharmaceutical manufacturer can also be an obstacle to finalizing a contract.
- Indication-based formularies have tiered structures based on market baskets, like rebate-based formularies, but the market baskets are based on indication. Drugs with more than one indication may appear in more than one market basket or in more than one tier. Each drug’s effectiveness is based on clinical studies and medical literature, not its effect on an individual member. These formularies require that member diagnosis information be available.
5. Closed formularies exclude coverage of some drugs to control costs. These formularies are less member- and prescriber-friendly than open formularies, which have few if any limitations. Though generally unpopular with members, closed formularies offer lower overall drug costs for the payer.
Help your clients find the right formulary
Before making any formulary decision, it is important to consider the plan’s current drug utilization mix and how that aligns with the covered and excluded drugs on the selected formulary. Most PBMs offer multiple formulary options, each with its own pros and cons depending on your client’s goals for cost savings and member disruption. It’s important to consider medication access and cost for both the plan and its members, as well as how contractual terms related to drug rebates align with your client’s needs. Take the time to review your client’s formulary and implement changes to ensure they have an optimal formulary strategy that maintains the highest clinical quality while effectively lowering their prescription drug costs.
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- 42 CFR 1001 (2020). Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of- Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees.