Moving Towards Better Formulary Management

Published on: 
The American Journal of Managed Care, January 2005, Volume 11, Issue 1

Inflation-adjusted spending on prescription medicationsin the United States has doubled since 1994,growing 3 times as fast as healthcare spending as awhole. Americans are using more drugs, and payingmore for them. Whether this is a good or bad developmentdepends on one's perspective. In many instances,drugs have been shown to be very cost-effective treatmentsfor chronic illness; they forestall complications,reduce attendant medical utilization, and make patientsmore productive. But some drugs are overused—or usedinappropriately—by vast segments of the Americanpopulation.

Either way, employers and the government—the primarypurchasers of drug coverage—are alarmed. Theresult has been a panoply of policies designed to steerphysicians and patients toward lower-cost drugs or lessuse. Nearly two-thirds of employees with drug coverageare enrolled in three-tier plans, and a growing numberof health plans now include a fourth tier for lifestyle orcosmetic drugs, such as medications for hair loss,weight reduction, and smoking cessation. Not only dothey give beneficiaries an incentive to use generic orlow-cost brand medications, they also encourage manufacturersto offer price discounts in exchange forplacing their products in the second tier. Adding acopayment tier, increasing existing copayments, orincreasing coinsurance rates substantially reduceshealth plan payments and overall drug spending.1

Tiered copayments are ill-suited for the latest high-costdrugs, including injectable and oral agents such asimatinib mesylate (Gleevec) for chronic myeloidleukemia. Biologics are of special concern because oftheir expense (often $1000 or more per month), thelarge number of products under development, and thelack of generic competition. As the number of high-costdrugs increases, benefit managers' interest in monitoringand containing their utilization will intensify. Healthplans are likely to require consumers to share the costsof high-cost drugs via coinsurance rather than copayments.A plan might, for example, require beneficiariesto pay 25%-50% coinsurance for high-cost drugs, withouta maximum out-of-pocket expense. Imposing draconiancost-sharing arrangements on a small number ofpatients taking very expensive medications thatimprove quality of life is neither efficient nor equitable.

Health plans and pharmacy benefit managers (PBMs)have taken other steps to contain pharmacy spending,either in addition to tiered cost sharing or in place of it.Such actions include prior authorization—wherein theconsumer, pharmacist, or physician must obtain permissionbefore a particular drug can be dispensed—andstep therapy that requires patients to try low-cost medicationsbefore a plan will cover a more expensive treatment.Some plans practice "counter-detailing" toeducate physicians about generic alternatives. Delate etal demonstrate that prior authorization can be extremelyeffective in lowering utilization for common medicationssuch as proton pump inhibitors.2 However, Wangand Pauly show that formulary restrictions in the privatesector can lead to reduced use in other populations.3 (In earlier work they and colleagues showedsimilar spillovers for Maine's Medicaid program).4

All of these are blunt tools for managing the pharmacybenefit. Formulary decisions are often made on thebasis of ingredient costs and manufacturer rebatesrather than clinical outcomes. Even in more enlightenedpharmacy and therapeutics committees, the decisionsare still based on aggregate measures without tailoring toeach patient's circumstances. Employers also haveincentives to discourage use beyond what may be bestfor the patient since many of the benefits of pharmacotherapyaccrue long after people have left their jobs.


The result is that plans are designing formularies thatare socially wasteful, and that patients perceive as overlyintrusive ("managed care backlash"). So what aresome of the solutions? One view is to create individualhealth savings accounts (HSAs) that can be used to payfor medical care, including outpatient drugs. Funds notused can be carried over to future years. Advocatesargue this would restore incentives to economize oncare, so service use would not have to be heavily managed.The RAND Health Insurance Experiment (HIE)demonstrated that much of the medical care that will beeliminated due to higher cost sharing is of little marginalbenefit—what one might label as "overuse"—and soexpenditures fall, but health is not affected.5

Health savings accounts are predicated on consumersbeing well-informed about the net benefits of treatment.The HIE was conducted in an era when pharmacotherapywas not an important component of chronic illnessmanagement. Today, appropriate use of efficacious medicationscan forestall or greatly delay disease progression.But treatment regimens often require high qualityand persistent patient self-management, and not allpatients are equally adept at complying.5 Compliancerequires an understanding of medical necessity and anability to select the most appropriate regimens. Theresult is that when faced with higher cost sharing, manypatients will forgo medications that everyone agrees theyshould be taking (even the patient!). The solution formany HSA advocates is to exempt clearly efficacioustreatments from cost-sharing requirements. A variationon this theme would have employers contribute to anemployee's HSA, for example, if a hypertensive patientfills 10 or more diuretic prescriptions per year. Ignoringthe problem with medication being flushed down toiletsjust to get a check, these exceptions still put health plansback in the role of formulary managers, which is whatHSAs were designed to avoid. It also is not tailored toindividual clinical needs.


Another promising trend is the move towards benefit-based copayments. This approach would make thepatient copayment depend on the expected therapeuticbenefit, as best determined using available evidence.The idea is to ensure that effective drugs get into thehands of patients who truly need them, and that thepatients continue to take them.7 By linking copaymentswith individual clinical (and perhaps social)need, plans can encourage cost-effective care withoutthe cumbersome framework of prior utilization or diseasemanagement. But formidable logistical hurdlesremain, including unambiguous scientific evidence ontreatment efficacy for a wide range of products and riskfactors. Decisions about whether—and how—to incorporatedifferences in socioeconomic status will be controversial.For example, less educated patients oftenhave lower rates of compliance. Does this mean the lesseducated should get a lower copayment (because it willencourage compliance) or a higher one (since treatmentis less efficacious)? More complicated benefit designsare likely to confuse patients, and Shrank et al havedemonstrated physicians' reluctance to get involved inthese issues.8

The challenge for benefit managers is to makepatients more sensitive to the cost of treatment withoutencouraging them to forego cost-effective care. Thisrequires not only knowing how patients respond to differentincentives, but also cataloging the net benefits ofalternative therapies. Cost-effectiveness analysis as it iscurrently practiced will not be sufficient. For it to beuseful, such analyses need to take into account all theconsequences of therapy—for current and futurehealthcare costs, for productivity, and patient utility.Doing so will also require more and better data on bothefficacy and costs, and we will need to standardize howthey are measured and collected. Including economicbenefits as part of postapproval drug surveillance andquality reporting would represent a good start. Until wemove in this direction, formulary management will continueto be driven by piecemeal measures designed toachieve divergent objectives.

From RAND, Santa Monica, Calif.

Address correspondence to: Dana P. Goldman, PhD, RAND, 1700 Main Street, SantaMonica, CA 90407-2138. E-mail:


1. Joyce GF, Escarce JJ, Solomon MD, Goldman DP. Employer drug benefit plansand spending on prescription drugs 2002;288(14):1733-1739.

Am J Manag Care.

2. Delate T, Mager DE, Sheth J, Motheral BR. Clinical and financial outcomesassociated with a proton pump inhibitor prior authorization program in a Medicaidpopulation. 2005;11(1):29-36.

Am J Manag Care.

3. Wang YR, Pauly MV. Spillover effects of restrictive drug formularies: A casestudy of PacifiCare in California. 2005;11(1):24-26.

Am J Manag Care.

4. Wang YR, Pauly MV, Lin YA. Impact of Maine's Medicaid drug formularychange on non-Medicaid markets: spillover effects of a restrictive drug formulary.2003 Oct;9(10):686-696.

Free for All? Lessons from the Rand Health Insurance Experiment.

5. Newhouse JP. Cambridge, MA: Harvard University Press; 1993.

Proc Natl Acad Sci USA.

6. Goldman D, Smith J. Can patient self-management help explain the SES healthgradient? 2002;99(16):10929-10934.

Am J Manag Care.

7. Fendrick AM, Smith DG, Chernew ME, Shaw SN. A benefit-based copy for prescriptiondrugs: patient contribution based on total benefits, not drug acquisitioncost. 2001:7(9):861-867.

Am J Manag Care.

8. Shrank WH, Young HN, Ettner SL, Glassman P, Asch SM; Kravitz RL. Do theincentives in 3-tier pharmaceutical benefit plans operate as intended? Results froma physician leadership survey. 2005;11(1):16-22.