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Examples of formulary exclusions (removals) and updates

Formularies and PBMS

What Is a Formulary?

In its simplest form, a formulary is a list

A drug formulary is a preferred drug list. The list of medications on the formulary changes based on new evidence-based medicine, the medical decision-making of doctors, pharmacists, and clinicians.

A formulary is dynamic

According to the AMCP (Academy of Managed Care Pharmacy) a formulary is not static, it is dynamic.  Because of the dynamic nature of drug development and research, formulary lists are dynamic.  A formulary is described by AMCP as:

“…An ongoing process whereby a health care organization, through its physicians, pharmacists, and other health care professionals, establishes policies on the use of drug products and therapies and identifies drug products and therapies that are the most medically appropriate and cost-effective best to serve the health interests of a given patient.” [i]

Understanding formulary drugs and non-formulary drugs, (also known as off formulary drugs) is as simple as viewing a current formulary list, or as complex as some of the topics below.  I will summarize a few points for you below.

Formulary lists are driven by policy, not by medical codes

Formularies are not driven by billing codes. Instead, the drugs chosen to be offered by a health plan (also called a ‘payer’) are those medications that a panel of independent medical experts on a pharmacy and therapeutics team (P&T) have selected based on evidence of the drug’s efficacy and price. HCPCS codes[ii] apply when a physician administers the drugs but do not apply when the patient self-administers the drug and does not claim insurance to cover the cost.[iii]

Reading formulary listings

Sometimes, formulary symbols are used to refer to the following meanings:

  1. C = Covered,
  2. EXCL = Excluded Drug
  3. NF = Non-formulary
  4. NP = Not preferred
  5. NR = Not reimbursable
  6. ONC = Oncology Program
  7. P = Preferred PDL
  8. PA = Prior Authorization
  9. PDL = DHS’ Preferred Drug List
  10. PX = Preferred at level X, with X indicating a more preferred medication or supply. This will show as “P24” for a level 24 medication or supply. Higher numbers indicate higher preference.
  11. QL = Quantity Limit, Age = Age Edit
  12. SP = Specialty Drug,
  13. ST = Step Therapy
  14. U = Unknown formulary status

NOTE: These are examples. Formulary listings, symbols and codes usually vary by PBM and payor

Formularies should serve multiple purposes

Formularies should if properly structured, serve multiple purposes, including:

  1. encouraging the use of safe and effective medications based on clinical guidelines
  2. controlling cost and insurance utilization

What is a PBM?

Pharmacy benefit managers (PBMs) typically negotiate discounts and rebates with pharmaceutical manufacturers on behalf of their clients—insurers, employer groups, and other payers—to create and manage prescription medicine formularies.[iv]

Who are the Largest PBMs?

The PBM market is highly consolidated, with just 3 PBMs—CVS Caremark, Express Scripts, and OptumRx—managing the pharmacy benefits for approximately 256 million Americans.[v] In 2019, these 3 PBMs handled 74% of all prescriptions processed in the U.S.[vi]

What Influence do PBMs Have over the Access to and Cost of Drugs?

PBMs have significant influence over drug cost, supply and access and because the formularies are set by PBMs, even the drugs that apear as options in e prescribing systems in Electronic Health Records (EHRs).  This tends to influence physician behavior regarding what medications they prescribe. PBMs do not actually supply drugs, but they are central to the flow of funds between drug manufacturers, pharmacies, health plans, drug wholesalers, hospitals, and physicians.  PBM negotiated discounts and rebates, as well as formulary placements, are negotiated by PBMs.  For more regarding the flow of funds and flow of drugs, see this article.

Health Plans Often Outsource Formulary Management to Pharmacy Benefit Managers (PBMs)

Because of the complexity and numerosity of drugs, new FDA approvals, and ongoing industry research, health plans may outsource formulary management and coverage determinations and pharmacy benefit management companies (PBMs) as a third-party, or they may own or acquire a PBM to perform formulary management functions for the plan.

Because Formularies are Dynamic, Patients may Experience Changes in Access to Drugs that are Managed by PBMs and their Formularies

Patients with insurance may have limited or curtailed access to certain drugs based on several methods used by PBMs and formulary policy committees.  These include:

  1. Formulary tiers (some formularies may have three tiers, four tiers, five tiers or six tiers)
  2. Step therapy
  3. Open vs. closed formularies
  4. Pharmacy & Therapeutics (P&T) Committee Review Policy Updates
  5. Generic Substitution
  6. Therapeutic Alternates
  7. Therapeutic Interchange
  8. Therapeutic Substitution
  9. Drug Utilization Review (Drug Use Review, DUR, and Drug Use Evaluation)
  10. Formulary Exclusions

There is an appeals process, discussed in another article that provides insured patients with a method to appeal a decision not to cover a drug that is not on a formulary.

PBM Policy May Vary Regarding Access to Drugs not on a Formulary

Health plans may provide physicians, and their patients access to non-formulary drugs where medically necessary.

Ethical Standards for Patients / Healthcare Consumers Regarding PBMs and Formularies

Notably, the Principles of a Sound Drug Formulary System provide that PBMs and the formularies they manage should: [vii]

  • “Provide a rationale for specific formulary decisions when requested. The formulary system should include a well-defined process for the physician or other prescriber to use a non-formulary drug when medically indicated.”
  • “Enable individual patient needs to be met with non-formulary drug products when demonstrated to be clinically justified by the physician or other prescriber.”
  • “Institute an efficient process for the timely procurement of non-formulary drug products and impose minimal administrative burdens.”
  • “Provide access to a formal appeal process if a request for a non-formulary drug is denied.” (See Formulary Exceptions)
  • “Include policies that state that practitioners should not be penalized for prescribing non-formulary drug products that are medically necessary.” [viii]

One of the challenges of the ethical guidelines is that in our opinion they presume a thoughtful and sometimes protracted appeals process. If a drug is needed on an emergent basis and not covered by insurance, or if a prior authorization is required,  a physician may need to forgo prior authorization and opt to treat (or, be required to treat) a patient to stabilize them under EMTALA

Related Articles

Drug Distribution, Drug Pricing, and Drug Classification Systems

Pharmacy Benefit Managers, Drug Pricing and Appeals

How do Pharmacy Benefit Managers Determine Pricing?

Pharmacy Benefit Manager Expert Witness

Knox-Keene Act, Drug Formularies and Pharmacy Benefit Managers in California


[i] AMCP (Academy of Managed Care Pharmacy)

[ii] Centers for Medicare and Medicaid (CMS) The Healthcare Common Procedure Coding System (HCPCS) is divided into two principal subsystems, referred to as level I and level II of the HCPCS.

[iii] What are HCPCS J Codes.

[iv] Xcenda, AmerisourceBergen. Skyrocketing Growth in PBM Formulary Exclusions Raises Concerns About Patient Access

[v] Webster K.:

CVS Caremark limits the purchase of essential medication to avoid stockpiling. Employer Benefit News.

Express Scripts. Daring to imagine a better health care system.

OptumRx. Pharmacy benefit management solutions.

[vi] Fein A. The 2020 economic report on U.S. pharmacies and pharmacy benefit managers. Drug Channels Institute. March 2020.

[vii] American Society of Health-System Pharmacists (ASHP).  Principles of a Sound Drug Formulary System.  “The endorsement of this document was reviewed in 2011 by the Council on Pharmacy Practice and by the Board of Directors and was found to still be appropriate.”

[viii] Id.

Michael F. Arrigo

Michael Arrigo, an expert witness, and healthcare executive, brings four decades of experience in the software, financial services, and healthcare industries. In 2000, Mr. Arrigo founded No World Borders, a healthcare data, regulations, and economics firm with clients in the pharmaceutical, medical device, hospital, surgical center, physician group, diagnostic imaging, genetic testing, health I.T., and health insurance markets. His expertise spans the federal health programs Medicare and Medicaid and private insurance. He advises Medicare Advantage Organizations that provide health insurance under Part C of the Medicare Act. Mr. Arrigo serves as an expert witness regarding medical coding and billing, fraud damages, and electronic health record software for the U.S. Department of Justice. He has valued well over $1 billion in medical billings in personal injury liens, malpractice, and insurance fraud cases. The U.S. Court of Appeals considered Mr. Arrigo's opinion regarding loss amounts, vacating, and remanding sentencing in a fraud case. Mr. Arrigo provides expertise in the Medicare Secondary Payer Act, Medicare LCDs, anti-trust litigation, medical intellectual property and trade secrets, HIPAA privacy, health care electronic claim data Standards, physician compensation, Anti-Kickback Statute, Stark law, the Affordable Care Act, False Claims Act, and the ARRA HITECH Act. Arrigo advises investors on merger and acquisition (M&A) diligence in the healthcare industry on transactions cumulatively valued at over $1 billion. Mr. Arrigo spent over ten years in Silicon Valley software firms in roles from Product Manager to CEO. He was product manager for a leading-edge database technology joint venture that became commercialized as Microsoft SQL Server, Vice President of Marketing for a software company when it grew from under $2 million in revenue to a $50 million acquisition by a company now merged into Cincom Systems, hired by private equity investors to serve as Vice President of Marketing for a secure email software company until its acquisition and multi $million investor exit by a company now merged into Axway Software S.A. (Euronext: AXW.PA), and CEO of one of the first cloud-based billing software companies, licensing its technology to Citrix Systems (NASDAQ: CTXS). Later, before entering the healthcare industry, he joined Fortune 500 company Fidelity National Financial (NYSE: FNF) as a Vice President, overseeing eCommerce solutions for the mortgage banking industry. While serving as a Vice President at Fortune 500 company First American Financial (NYSE: FAF), he oversaw eCommerce and regulatory compliance technology initiatives for the top ten mortgage banks and led the Sarbanes Oxley Act Section 302 internal controls I.T. audit for the company, supporting Section 404 of the Sarbanes Oxley Act. Mr. Arrigo earned his Bachelor of Science in Business Administration from the University of Southern California. Before that, he studied computer science, statistics, and economics at the University of California, Irvine. His post-graduate studies include biomedical ethics at Harvard Medical School, biomedical informatics at Stanford Medical School, blockchain and crypto-economics at the Massachusetts Institute of Technology, and training as a Certified Professional Medical Auditor (CPMA). Mr. Arrigo is qualified to serve as a director due to his experience in healthcare data, regulations, and economics, his leadership roles in software and financial services public companies, and his healthcare M&A diligence and public company regulatory experience. Mr. Arrigo is quoted in The Wall Street Journal, Fortune Magazine, Kaiser Health News, Consumer Affairs, National Public Radio (NPR), NBC News Houston, USA Today / Milwaukee Journal Sentinel, Medical Economics, Capitol ForumThe Daily Beast, the Lund Report, Inside Higher Ed, New England Psychologist, and other press and media outlets. He authored a peer-reviewed article regarding clinical documentation quality to support accurate medical coding, billing, and good patient care, published by Healthcare Financial Management Association (HFMA) and published in Healthcare I.T. News. Mr. Arrigo serves as a member of the board of directors of a publicly traded company in the healthcare and data analytics industry, where his duties include: member, audit committee; chair, compensation committee; member, special committee.

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