PBM Formulary: What is Closed vs. Open?

Understanding formularies—specifically the differences between a closed formulary and an open formulary—is a key part of optimizing healthcare costs and treatment options. For brokers and employers, that understanding is a driving force in how well healthcare expenses are managed, and determines how comprehensive employee coverage can be.

But what is a formulary, and why does it matter? A formulary is essentially a list of prescription drugs covered by a specific health insurance plan. These lists categorize medications into different tiers, each with varying levels of cost-sharing requirements. The inclusion of a drug on a formulary often depends on factors like clinical effectiveness, safety, and cost, but can also include considerations such as the availability of generics, therapeutic alternatives, or evolving regulatory guidelines. 

Essentially, formularies serve as a blueprint for managing prescription drug benefits within a healthcare plan, balancing clinical needs with financial considerations. They give employers a transparent way to align prescription drug programs with strategic goals and member care.

It can be challenging to choose what to focus on and what to invest in, what to ask and when to ask it, and where to dig deeper. That’s where PBMs (Pharmacy Benefits Managers) step in, providing a bridge to connect benefits and budget.

A PBM’s job is to act as an intermediary between healthcare providers, insurance companies, pharmacies, and pharmaceutical companies to manage prescription drug programs effectively. They negotiate drug prices, manage the formularies in question, and process prescription claims

What are the Pros and Cons of an Open Formulary?

An open formulary offers a wide range of prescription drugs based on cost or therapeutic category. This approach allows patients and healthcare providers a broad range of drug choices that are covered, and is ideal for employers or insurers that want to provide comprehensive coverage options. Members may be directed to preferred products with utilization edits such as a prior authorization or a step therapy. Over the counter, cosmetic, and medical products may not be included in coverage of an open formulary. 

Consider two insulin products: Insulin A and Insulin B. Clinically, they're identical - they work the same way and have the same safety profile. However, the PBM has already negotiated a lower cost for Insulin A.

In an open formulary:

Insulin A is the preferred product and is covered.

Insulin B, the non-preferred product, is also covered but with conditions:

• The patient must have tried Insulin A first.
• Insulin A must not have worked effectively for the patient.

Only then will Insulin B be covered.

What are the Pros and Cons of a Closed Formulary?

A closed formulary covers a more specific list of prescription drugs based on clinical effectiveness and cost considerations. While coverage is not as broad as an open formulary, a closed formulary still offers members and providers clinically effective options. Formulary exceptions can be made for members who cannot take the preferred, covered treatment options. 

Getting back to our example, remember that Insulin A and Insulin B are clinically identical - they work the same way and have the same safety profile. However, the PBM has already negotiated a lower cost for Insulin A.

In a closed formulary:

Insulin A, the preferred product, is covered.

Insulin B, the non-preferred product, is not covered.

• If the patient must take Insulin B, the healthcare provider can submit a request and if approved, Insulin B will be covered.

‍

Communicating Coverage: On- and Off-Formulary Prescriptions

Down the line, it will become important to clearly communicate what drugs and treatments are and aren't available to employees, and how to figure it out. Employers might choose to develop a detailed and easy-to-read list of all covered medications and treatments—and include information about any restrictions, such as prior authorization or step therapy requirements.

At its most basic, a drug covered on the formulary is a medication that is included in a health plan's approved list of covered medications, and the health plan will cover all or a significant portion of the cost (making it more affordable for patients). If a drug is not covered on the formulary, healthcare providers can submit a request explaining the reason why the patient needs the non-covered medication and provide any supporting reasons. If the request is approved, the plan will help pay for the medication as if it were covered on the formulary. 

Using on-formulary drugs often involves lower copayments or coinsurance as the plan helps to pay for the medication compared to drugs that are not on the formulary (off-formulary) where the patient may be responsible for the full cost. This encourages patients to use preferred medications, helping manage overall healthcare costs while still giving them access to necessary treatments and prescriptions.

How to Select the Right Formulary for Your Company

Choosing between an open and closed formulary takes consideration, investigation, and context. First, employers should map out the expected and potential healthcare needs of their employees, shortand long-term. This will help determine whether broader drug coverage or cost control is more valuable and beneficial (and when). 

When possible, that mapping should be done after gathering data on the types of medications employees currently use, and their satisfaction with existing coverage. It’s also helpful to look at common health conditions and prescription trends within your workforce, in order to understand the demand for specific drugs and treatments. Here’s a step-by-step checklist:

Whether you opt for the flexibility of an open formulary or commit to closed formulary cost control, making informed decisions rooted in an accurate understanding of the options will benefit both your organization and the people relying on it to manage their healthcare needs.

Ready to optimize your prescription drug program with SmithRx? Connect with us to see how our innovative PBM solutions can support your organization’s healthcare goals.