Formulary decisions determine which prescription drugs your health plan will cover, how much you pay out of pocket, and whether you need extra approval before filling a prescription. These decisions are made by committees within insurance plans, pharmacy benefit managers, and government programs, and they affect everything from whether a brand-name biologic sits on a low-cost tier or gets excluded entirely to whether your doctor must try a cheaper alternative first. The process blends clinical evidence, cost-effectiveness data, and hard-nosed rebate negotiations, and the downstream effects on patients range from modest copay differences to measurable changes in health outcomes.
How a Drug Lands on the List
Most formularies are shaped by a pharmacy and therapeutics (P&T) committee, a panel typically composed of physicians, pharmacists, and sometimes other clinicians employed by or contracted with the health plan. The committee reviews a drug’s clinical evidence, compares it with alternatives already on the formulary, considers safety profiles, and then votes on whether to add, exclude, or restrict the medication. In theory, this is a clinical exercise. In practice, financial considerations are woven in from the start, because the committee also weighs the drug’s cost relative to its therapeutic benefit and the rebate deals the plan has negotiated with manufacturers.
Once a drug is accepted, it gets assigned to a tier. A typical commercial formulary has three to five tiers: generics on the lowest-cost tier, preferred brands on the next, non-preferred brands higher, and specialty drugs at the top. Where a drug lands on this ladder directly shapes what you pay at the pharmacy counter. Some plans also maintain an exclusion list of drugs they will not cover at all, which gives them additional leverage when negotiating prices with manufacturers.
Cost-Effectiveness as a Decision Tool
Some organizations have moved beyond simple cost comparisons and begun formally incorporating cost-effectiveness evidence into formulary design. Thirty employer-sponsored plans, for instance, implemented a “Value-Based Formulary” program that uses cost-effectiveness data to guide both cost-sharing levels and coverage exclusions.1PubMed Central. Drug use and spending under a formulary informed by cost-effectiveness The idea is straightforward: drugs that deliver more health per dollar get lower copays, while drugs with poor value get placed on higher tiers or dropped.
A concrete example of this played out when one private payer’s P&T committee evaluated exenatide for diabetes. Economic modeling showed the drug’s incremental cost per quality-adjusted life-year ranged from roughly $13,000 to $35,000 depending on the comparator and time horizon. Those numbers fell within a range the committee considered acceptable, and the analysis influenced the decision to add exenatide to the formulary.2PubMed Central. Application of economic analyses in U.S. managed care formulary decisions: a private payer’s experience Early programs using value-based formulary designs have shown promising results: one reported pharmacy costs dropping by about 11% compared with projections, with no decline in medication adherence for chronic conditions like diabetes and hypertension.3PubMed Central. Design, implementation, and first-year outcomes of a value-based drug formulary Another found that when drugs were moved to lower copay tiers based on their value, utilization of those medications rose by about 17%.4PubMed Central. Impact of a Value-based Formulary on Medication Utilization, Health Services Utilization, and Expenditures
Despite these examples, formal cost-effectiveness analysis remains the exception rather than the rule in U.S. formulary management. Most P&T committees still rely primarily on clinical trial data, safety considerations, and net cost after rebates. The lack of a single national threshold for what counts as “good value” means that two plans can look at the same drug and reach different coverage decisions, which partly explains why your neighbor’s insurance might cover a medication that yours does not.
Rebates, Tiering, and the PBM Negotiation
Behind most formulary decisions sits a pharmacy benefit manager, the intermediary that negotiates drug prices and rebates on behalf of health plans. The formulary is one of the PBM’s most powerful bargaining tools. When a PBM can place a branded drug on a non-preferred tier or exclude it entirely, manufacturers face losing patients to competitors. That threat generates rebate offers: the manufacturer pays the PBM (and, ideally, the plan) a percentage of the drug’s list price in exchange for favorable placement.
Research on statin formularies illustrates the dynamic. Allowing a PBM to sort branded drugs into preferred and non-preferred tiers substantially increases the rebates manufacturers are willing to pay, compared with a flat formulary where every brand gets equal treatment.5Econometrica. Fisher–Schultz Lecture: Contracting Over Pharmaceutical Formularies and Rebates The ability to exclude a drug from coverage raises the stakes even further. Modeling of PBM competition confirms this structure: each PBM selects a price list and a formulary, and drug manufacturers offer rebates specifically tied to preferred-tier placement.6Manufacturing & Service Operations Management. PBM Competition in Pharmaceutical Supply Chain: Formulary Design and Drug Pricing
The result is that formulary decisions are never purely clinical. A drug that is clinically equivalent to a competitor may get preferred placement simply because its manufacturer offered a bigger rebate. Whether those rebate savings actually flow down to patients in the form of lower premiums or copays is a persistent and unresolved question in health policy. Critics argue that the rebate system incentivizes higher list prices, since manufacturers can offer larger percentage discounts off an inflated price. Defenders counter that without rebate leverage, payers would have little ability to control drug spending at all.
Prior Authorization and Step Therapy
Formulary decisions do not stop at coverage and tiering. Plans also layer on utilization management tools that determine the conditions under which a covered drug will actually be paid for. The two most common are prior authorization, which requires your doctor to get the plan’s approval before prescribing, and step therapy, which requires you to try a cheaper drug first and fail on it before the plan will cover a more expensive alternative.
These tools are meant to steer prescribing toward cost-effective options and prevent inappropriate use. But their real-world effects on patients have drawn significant scrutiny. A systematic review synthesizing evidence from 25 studies found that prior authorization requirements were associated with care delays, disease worsening, preventable hospitalizations, longer hospital stays, and lower rates of disease-free survival.7PubMed. Adverse effects of health plan prior authorization on clinical effectiveness and patient outcomes: A systematic review Survey data paints a similarly grim picture: roughly 92% of providers reported that patient care was delayed by prior authorization, and among those reporting delays, about 60% saw patients develop more severe symptoms as a result.8PubMed Central. Perceptions of prior authorization burden and solutions
From the patient side, about a third of those surveyed reported negative effects on their ability to seek treatment, with the overwhelming majority of that group citing additional stress and delays in care.9PubMed Central. Perceptions of prior authorization burden and solutions Allergy and immunology specialists have flagged that prior authorization can lead to serious adverse events in some cases, particularly when time-sensitive treatments like biologics are held up.10PubMed. The Impact of Prior Authorization on Clinical Practice and Patient Care Outcomes The administrative burden is substantial, too. Physicians and their staff spend hours each week on phone calls, faxes, and electronic submissions to get approvals, time that could otherwise go toward patient care.
What Happens When Patients Get Switched
One of the most consequential formulary decisions is removing or downgrading a drug that patients are already taking. When a plan drops a medication from its preferred tier or excludes it entirely, patients on that drug face a choice: switch to the plan’s new preferred alternative, pay substantially more out of pocket, or stop treatment altogether. This kind of change, driven by the plan’s financial considerations rather than a clinical reason, is known as non-medical switching.
The evidence on non-medical switching is fairly damning. A systematic review found that switching was negatively associated with medication-taking behavior in 75% of cases examined and negatively associated with economic outcomes in about 69% of cases. Among patients who were stable and well-controlled on their existing therapy, roughly 69% of outcomes measured after a non-medical switch were negative, with the remainder neutral. Positive outcomes were rare.11PubMed. Impact of non-medical switching on clinical and economic outcomes, resource utilization and medication-taking behavior: a systematic literature review
The financial picture is counterintuitive. Switching to a cheaper drug should save money, but the disruption often generates costs elsewhere. In one study of patients switched from adalimumab following a formulary change, switchers incurred significantly higher total costs (roughly $22,000 versus $17,400) compared with patients who stayed on their original therapy, driven largely by higher medical costs from disease flares and additional office visits.12Value in Health. Economic Impact of Nonmedical Switching from Adalimumab Following a Formulary Management Change A separate systematic review focused on biosimilar switches found the same pattern: increased healthcare utilization and associated costs after switching, potentially eroding the savings from lower drug prices.13PubMed Central. The Economic Impact of Originator-to-Biosimilar Non-medical Switching in the Real-World Setting
Cost-Sharing and Whether Patients Fill Their Prescriptions
How much you pay at the pharmacy counter is one of the most direct ways a formulary decision affects your health, because copay levels strongly influence whether people actually take their medications. A systematic review spanning 79 studies found that regardless of disease area, higher cost-sharing was associated with worse adherence, and the larger the copay increase, the steeper the drop in adherence.14PubMed Central. Cost-sharing and adherence, clinical outcomes, health care utilization, and costs: A systematic literature review This is not just about convenience. For expensive specialty drugs, high coinsurance can lead patients to abandon therapy altogether. Among a group of nearly 16,000 patients starting biologic anti-inflammatory drugs or multiple sclerosis therapies, drug coupons that reduced monthly out-of-pocket costs to under $250 made patients far less likely to abandon treatment.15PubMed. Specialty drug coupons lower out-of-pocket costs and may improve adherence at the risk of increasing premiums
The broader picture is sobering. A systematic review examining the full range of formulary restrictions found that about half of all measured outcomes were negative for patients or payers. While drug utilization reliably dropped when restrictions were imposed (over 90% of utilization outcomes showed lower use), the pharmacy cost savings were sometimes offset by increased medical costs from worsening conditions and additional healthcare visits.16PubMed Central. The Effect of Formulary Restrictions on Patient and Payer Outcomes: A Systematic Literature Review Formulary restrictions can look like savings in the pharmacy budget while quietly moving costs to the medical budget.
Biosimilar Formulary Placement in Medicare
The rollout of adalimumab biosimilars in Medicare Part D offers a real-time case study in how formulary decisions shape market adoption. In 2023, every Medicare Part D plan covering adalimumab listed only the original brand-name product. By 2024, about half of plans offered dual coverage of the originator and at least one biosimilar. By 2025, nearly 80% of plans provided dual coverage, and biosimilar-exclusive coverage began emerging. The shift accelerated sharply: by 2026, about 46% of plans covered only biosimilars, while originator-only coverage had dropped to less than 1%.17PubMed. Increasing formulary adoption of adalimumab biosimilars and differential cost-sharing in Medicare Part D plans
Tier placement and coinsurance rates have tracked with this shift. Plans covering only biosimilars in 2026 had a median specialty-tier coinsurance of 25%, compared with 33% for the shrinking number of originator-only plans.18PubMed. Increasing formulary adoption of adalimumab biosimilars and differential cost-sharing in Medicare Part D plans Yet early uptake was sluggish. Despite having formulary access, the most-used biosimilar in 2023 was one commonly offered on a lower tier, suggesting that affordability at the point of sale was influencing patient and prescriber behavior more than simple formulary inclusion.19PubMed Central. Savings from biosimilars and Medicare formulary access Being “on the formulary” matters, but where on the formulary and at what coinsurance rate matters just as much.
Medicare’s Protected Classes and the Limits of Negotiation
Medicare Part D operates under a unique constraint that does not apply to commercial insurance: six drug classes are designated as “protected,” meaning plans must cover all or substantially all drugs within those categories. The protected classes include anticonvulsants, antidepressants, antipsychotics, immunosuppressants for transplant rejection, antiretrovirals for HIV, and antineoplastics (cancer drugs). The policy exists to ensure that vulnerable patients always have access to the specific medication that works for them, since drugs within these classes are not always interchangeable.
The trade-off is significant. Because plans cannot exclude protected-class drugs from their formularies, they lose their most powerful negotiating tool. Research covering 2011 to 2019 found that average rebates in protected classes grew about 22.5 percentage points less than rebates in non-protected classes, a period during which formulary exclusions were increasing across the board. The gap was especially wide for drugs with a high share of Medicare patients.20PubMed Central. Medicare Part D Protected-Class Policy Is Associated With Lower Drug Rebates Separately, protected-class status was associated with roughly $112 to $121 million per drug per year in higher U.S. sales, driven by increases in both price and quantity.21PubMed. How protected classes in Medicare Part D influence U.S. drug sales, utilization, and price
This creates an awkward policy tension. The protected-class rule achieves its goal of ensuring patient access, but at a steep cost: manufacturers of drugs in these classes face less pricing pressure, and taxpayers and beneficiaries end up paying more. Reform proposals have circulated for years, but rolling back protections carries obvious risks for patients who depend on specific medications within those classes.
The Inflation Reduction Act and Formulary Ripple Effects
Recent legislation has introduced new wrinkles into formulary strategy. The Inflation Reduction Act allows Medicare to negotiate maximum fair prices for certain high-spending drugs, which could reduce what the government pays for those medications. But there is a catch: if negotiated prices shrink manufacturer rebates, PBMs may respond by shifting costs onto patients through tier placement changes. One modeling study examined what would happen if the three largest PBMs moved blood-thinning drugs apixaban and rivaroxaban to their highest formulary tier. The projected increase in patient copay amounts ranged from roughly $340 million to $690 million combined for both drugs. The resulting abandonment of therapy could affect hundreds of thousands of patients and lead to as many as 145,000 additional major cardiovascular events and up to 97,000 additional deaths.22PubMed Central. Could the Inflation Reduction Act Maximum Fair Price Hurt Patients?
Whether PBMs would actually make such aggressive tier changes is debatable. The scenario represents a worst case. But it illustrates a fundamental truth about formulary decisions: they do not happen in isolation. A policy that reduces drug prices upstream can trigger formulary adjustments downstream that end up harming the patients the policy was meant to help. Any serious reform of drug pricing has to anticipate how the players in the middle of the supply chain will respond.
Rare Diseases and the Coverage Gap
Formulary decisions hit especially hard for patients with rare diseases. Many orphan drugs are the only FDA-approved treatment for a given condition, which you might expect to guarantee coverage. In practice, an early examination of health insurance exchange plans found that while drugs that were the sole approved treatment for a rare disease had relatively robust coverage (at least 65% of plans), that coverage often came loaded with utilization management requirements. More than 70% of plans placed these medications on their highest tier and used coinsurance rather than flat copays, with coinsurance rates ranging from 10% to 50%.23PubMed Central. An early examination of access to select orphan drugs treating rare diseases in health insurance exchange plans Bronze-tier marketplace plans were far less likely than silver-tier plans to cover these drugs at all.
For a patient with a rare disease, these formulary decisions can be existential. A 30% coinsurance on a drug that costs $30,000 a year means $9,000 out of pocket, enough to force some patients off treatment entirely. Patient assistance programs and manufacturer copay support exist, but they are patchwork solutions that vary by drug and insurer. The underlying formulary architecture remains hostile to high-cost, low-volume medications.
Why the Same Drug Gets Different Coverage in Different Countries
If you have ever wondered why a drug available freely in one European country requires extensive paperwork in another, the answer lies in diverging health technology assessment processes. A study comparing orphan drug coverage decisions across four European countries found that six out of ten drugs received different recommendations. The disagreements stemmed not just from looking at different evidence but from interpreting the same evidence differently, from varying tolerance for clinical uncertainty, and from different frameworks for weighing factors like disease severity and orphan status. Access schemes like confidential price discounts and requirements for periodic reassessment also influenced outcomes, making the same drug appear cost-effective in one country and unacceptable in another.24PubMed Central. Why do health technology assessment coverage recommendations for the same drugs differ across settings?
The U.S. system is distinct in that it has no single national formulary and no unified health technology assessment body with binding authority. Instead, thousands of individual plans each make their own coverage determinations, guided by their own P&T committees and influenced by their own rebate negotiations. The Veterans Health Administration operates something closer to a national formulary and has demonstrated that this model can shift prescribing behavior toward selected drugs, achieve sizable price reductions, and significantly decrease drug spending.25Health Affairs. The impact of a national prescription drug formulary on prices, market share, and spending: lessons for Medicare? Whether that approach could or should be scaled to the broader U.S. population remains one of the long-running debates in American health policy.
Gene Therapies and the One-Time-Payment Problem
The newest frontier in formulary decision-making involves gene therapies, treatments delivered in a single administration that can potentially cure conditions like spinal muscular atrophy, hemophilia, or sickle cell disease. These therapies carry price tags that can exceed $2 million for a single dose, creating a category of drug that existing formulary frameworks were never designed to handle. The traditional model of monthly copays and annual pharmacy budgets does not translate well when the entire cost lands in one year, even if the benefit lasts a lifetime.
Three interconnected challenges face formulary committees evaluating gene therapies: determining whether the price reflects the long-term value of the treatment, managing the clinical uncertainty about how long the benefits actually last, and absorbing the short-term budget shock without destabilizing the plan’s finances. Some payers have experimented with outcomes-based contracts where the manufacturer refunds a portion of the cost if the therapy fails to deliver its promised benefit over time. Others have explored installment-payment models that spread the cost across multiple years. None of these approaches has become standard, and for patients with conditions treatable by gene therapy, formulary access remains uneven and unpredictable.
The gene therapy challenge also exposes a deeper tension in formulary design. Committees are accustomed to evaluating drugs with ongoing costs that can be adjusted year to year. A gene therapy that works is, in economic terms, a front-loaded investment with a long and uncertain payoff period. Traditional cost-effectiveness thresholds struggle with this structure, and the risk of getting the coverage decision wrong is magnified in both directions: deny access and a patient misses a potentially curative treatment; grant unrestricted access and the plan absorbs a cost it may never recoup if the therapy underperforms.