Executive Summary
Modern formularies initially emerged in the 1980s and 1990s as tools for managing prescription drug costs within healthcare institutions. However, significant changes occurred after the passage of the Affordable Care Act (ACA) in 2010, which imposed new standards on prescription drug coverage. Despite these reforms, prescription drug spending continued to rise after the ACA took effect. This led to wider adoption of tiered formularies and complex cost[1]sharing structures. This period also witnessed the expanded influence of PBMs playing a central role in negotiating drug prices and benefits management.
Today, nearly all major U.S. health plans contract with PBMs that influence formulary decisions, often hinging on price negotiations, and wielding substantial bargaining power within the healthcare system. The lack of enforceable rules and transparency in formulary placement decisions, coupled with PBMs’ financial incentives tied to rebates, have made them influential but controversial players in the prescription drug market.
Formulary practices driven by Pharmacy Benefit Manager (PBM) negotiations and health plans’ cost-cutting motives often create unfair situations for patients. Many of these harms stem from the fact that PBMs negotiate rebates based on contract terms and volume, with little transparency on how much is passed to patients. This complex incentive structure can prioritize rebate volume over drug value, leading to formulary practices that limit patient access, increase costs, and hinder competition.
The suppression of competition is particularly acute for generic drugs and biosimilars, which are designed to make prescription drugs more affordable. Health plans may place generics on non[1]generic tiers, preferring higher-cost drugs over affordable alternatives. Despite cost-saving potential, generics face hurdles in obtaining coverage, delaying patient access. PBMs’ incentives also lead to biased formulary placements, resulting in patients overpaying for generics and biosimilars. Beyond cost implications, these practices can lead to drug shortages as manufacturers lose incentives to produce new products, increasing the market’s vulnerability to supply chain issues and demand spikes.
Discriminatory tiering tactics like “adverse tiering” disproportionately impact patients with chronic or severe conditions. The practice of “lasering” high-cost patients out of a health plan’s coverage further exacerbates the issue, creating hurdles for patients relying on specialty drugs. Access and utilization restrictions, such as prior authorization and step therapy, often burden patients, particularly those with chronic illnesses, even when they may not be medically necessary.
Congress has shown increased interest in addressing the role of PBMs in rising prescription drug prices, including their influence on drug formularies. Several bipartisan PBM reform bills have recently been reported by Senate committees, all of which contain provisions related to formulary practices. Meanwhile, the FTC has launched an inquiry into PBMs’ influence on prescription drug access and affordability, specifically examining the impact of rebates and fees from drug manufacturers on formulary design and drug costs for payers and patients.
Addressing these harms requires raising awareness among patients and advocates about formulary complexities and their rights, along with implementing specific policy reforms. In addition, policymakers should prioritize reforms that increase transparency, prohibit unethical practices, incentivize more open formularies, and require more generics and biosimilars to be placed on the lowest cost tiers. These changes can transform formularies into patient-focused tools, aligning with broader goals of a more equitable healthcare system