Formulating Prescription Drug Formularies

Ever wondered how formularies are formulated? Our VP of Clinical Services Ken Perrin breaks down preferred vs non-preferred drugs, tiers, and specialty drugs.

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Formulating Formularies

Formularies or preferred drugs lists are dynamic lists of medications available through a prescription drug benefit plan. Clinical product information and medical literature are used by a pharmacy & therapeutics (P&T) committee to ensure access to safe, effective prescription drugs.

Preferred vs non-preferred drugs

A medication is designated as a preferred drug upon review and approval by the P&T committee for clinical effectiveness and safety. Cost effectiveness relative to similar drugs may be considered by the P&T committee or a separate body. A non-preferred drug is one that is considered clinically equivalent to a less expensive one in the same therapeutic class.

Tiers

Pharmacy Benefit Managers (PBMs) like IPM make formulary benefit design recommendations to clients, but clients actually make the benefit design decisions. The decisions include classification of formulary drugs into different tiers, with different levels of cost-sharing (co-payments or coinsurance).

Traditional formulary design consisted of two tiers: one for generics and the other for brand drugs. Twenty-five years ago, the average retail copay differential was less than $5 between prescription generic and brand medications.

Efforts to manage drug spend have prompted PBMs and health plans to move to more complex designs with a greater number of tiers (in a three-tier plan there is one tier composed mainly of generics, another for preferred drugs, and a third tier for non-preferred drugs). Usually, the lower the tier, the lower the out-of-pocket cost to the consumer. Variable cost-sharing arrangements help make formulary management a more effective tool. Specialty drugs often make up one or two additional higher-cost tiers.

The 2019 annual Henry J. Kaiser Family Foundation (KFF) employer health benefits survey1 found that 84% of covered workers are in plans with three, four or more cost-sharing tiers for prescription drugs (not including specialty drugs).

Copayments are still the most common form of cost-sharing. The report says that in plans with three or more tiers (not including tiers for specialty drugs), average copayments are $11 for first-tier drugs, $33 for second-tier drugs, $59 for third-tier drugs and $123 for fourth-tier drugs. Coinsurance rates are 18% for first-tier drugs, 24% for second-tier drugs, 34% for third-tier drugs and 29% for fourth-tier drugs).

Fourth tier drugs are typically applied to high-deductible health plans (HDHPs), coupled with a savings option – a health savings account (HSA).

Specialty Drug Tiers

Specialty drug – mainly biologics – are characteristically high-cost medications. The KFF survey found that 97% of covered workers at companies with 200 or more employees have coverage for specialty drugs; of those people, 45% are in a plan with at least one cost-sharing formulary tier devoted to specialty drugs. Cost-sharing for specialty drugs is usually in the form of coinsurance (a percentage of the cost) instead of a copayment (a set fee), with a capped copay limit.

IPM Formularies

IPM recommends three standard formularies for prescription drugs, as well as a separate tier for specialty drugs:

  • IPM Focus Formulary
    This narrow formulary consists of multiple brand drugs in each therapeutic class, combined with most low-cost generic drugs.
  • IPM Open Formulary
    This broad formulary consists of a selection of brand-name drugs and almost all generic drugs.
  • IPM High Performance Formulary
    This formulary takes an aggressive approach to managing drug trend through a closed formulary benefit design, focusing on preferred brand and generic medications.