March 7, 2024

In the intricate world of health care, PBM (Pharmacy Benefit Manager) formularies serve as indispensable tools that streamline the management of prescription drugs. But what exactly do they entail, how are they crafted, and why do they matter? Let’s break it down in a straightforward manner.

Formularies are comprehensive lists of prescription drugs that an insurance plan covers. Think of them as thoughtfully curated selections of medicines, chosen based on factors such as their impact, safety and cost. In a sense, they are menus of approved drugs.

Formulary Development:

Creating a formulary is a systematic process. First, health care experts evaluate various medicines to gauge their efficacy and safety in treating specific conditions. This also considers what is already available on the market.

Second, they consider the financial aspect, weighing how much each medicine costs and often with brand name medications, the impact of rebates on net cost. The goal is to strike a balance between medicines that work best and are also economically feasible.

It is important to remember some key aspects of formularies.

  • Formularies are not static documents; they evolve over time due to factors like the emergence of new medicines, alterations in costs or safety concerns. They require regular updates and most PBMs update at least twice yearly and others on a quarterly basis.
  • Formularies do not include all available medications. The list of medications available exceeds what would make sense on a list. Formularies are representative of the most popular medications that people may be looking for. When in doubt, the PBM can answer questions about medications not included on the list.
  • A PBMs provided formulary is typically a standard document. Formularies may not reflect specific plan inclusions or exclusions unless the PBM is providing you with a plan specific formulary.

Examples of Types of Formularies:

Open Formulary:

An open formulary has limited exclusions on medications. This leads to a wide range of choices when it comes to selecting medications. Open formularies may lead to higher medication costs for both patients and plan sponsors due to lower rebate amounts and the fact that the design of open formularies does not direct patients to cost-effective alternatives.

Closed Formulary:

In a closed formulary, the number of covered medications is more limited. Usually, these formularies only cover a specific list of drugs. Closed formularies are often put in place as a cost containment measure, and they aim to encourage the use of specific, preferred drugs.

However, closed formularies still contain options and alternatives for other medications in the market. This ensures patients still have access to high quality, safe and effective medications.

Custom Formulary:

Working with an experienced pharmacy benefit consultant, like Innovative Rx Strategies, some plan sponsors may have the option to create a custom formulary for a more tailored approach. This can provide additional cost containment measures as well as better control against volatility.

To creating a custom formulary, plan sponsors can consider a variety of approaches including custom formularies, custom exclusion lists, custom new drug to market approaches, custom tier design or other custom criteria.

Tiered Formulary:

Most types of formularies contain tiers. A tiered formulary categorizes drugs into different tiers or levels based on their cost and clinical effectiveness. Typically, the formulary will have several tiers, with each tier representing a different level of cost-sharing for the patient. The drugs in each tier may also have different copayment or coinsurance amounts.

Here is a common breakdown of the tiers:

  • Tier 1: Preferred generics (lowest cost-sharing)
  • Tier 2: Non-preferred generics or preferred brand-name drugs (moderate cost-sharing)
  • Tier 3: Non-preferred brand-name drugs (higher cost-sharing)
  • Tier 4: Specialty medications or high-cost drugs (highest cost-sharing)


The type of formulary plan sponsors should elect depends on various factors, including the goals of the plan sponsors, cost considerations and the desire to balance patient choice with cost control.

Let the team at Innovative Rx Strategies discuss your current options as well as future considerations to help you navigate the complex healthcare landscape with confidence.


Reach out to our team