A formulary is a list of the medications an institution makes available. Hospitals have always had them to avoid having redundant medications that will go out of date before being ordered, or to negotiate lower prices on popular medicines.
Prescription plans also have formularies. They may be "open formularies," where drugs not on the formulary are still available (though there may be advantages to the patient or doctor for complying with the formulary). Or they may be "closed formularies," in which drugs not on the formulary are not paid for except by special arrangement with the plan. These formularies can have several purposes:
1. Exclude older, discredited drugs as well as drugs whose abuse potential outweighs their benefits.
2. Inform doctors of the relative cost of drugs within a class of drugs with similar uses, so they can get the most bang for the buck. In a closed formulary, drugs that are far more expensive than comparable ones will probably be excluded completely.
3. Allow the plan to negotiate lower prices on drugs that are "on the formulary," and therefore, will theoretically be used in higher volume. Since the drugs are usually purchased by independent pharmacists who fill the prescriptions and then bill the HMO, the discounts are given as "rebates," money paid to the HMO by the drug company later based on the number of prescriptions filled for its drugs.
4. Allow the plan to insist that less expensive or safer drugs be tried before going to a relatively restricted drug.
5. Make sure that doctors prescribing less frequently used or more dangerous drugs are using them appropriately. For instance, the doctor may need to explain why a 3 year old needs Prozac, or may need to demonstate that he understands the difference between the drug he is prescribing and a more common one with a similar name (to prevent some common prescribing errors).
6. Limit the length of time a patient is on a drug if there is no evidence it is for more than a temporary condition.
7. Limit quantities of drugs that can be dispensed within a given period to reasonable amounts. This is especially true with drugs that are often diverted and resold at low prices to unethical pharmacists or other patients without prescription coverage, instead of being used by the patient for whom they were prescribed.
8. Exclude drugs whose uses are not directly to treat illness. For instance, some prescription drugs are for cosmetic purposes like hair loss, and are usually not covered by insurance. Other plans may exclude coverage in their contract of entire types of medical care, like infertility, and therefore also exclude the drugs to treat it.
Prescription drug costs have been rising very rapidly both due to the large number of new, too-useful-to-not-use drugs, and the large amounts drug companies spend marketing those drugs to patients and doctors. Patent protection allows drug companies to charge anything the market will bear without any competing generics for many years. These higher drug costs are one of the major reasons insurance costs are rising, and insurers are responding by trying to squeeze more malleable parts of the market -- hospitals, physicians, and pharmacists, who have to compete against each other and cannot set their prices wherever they want.
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©2000 Eileen K. Carpenter, MD