What is a formulary system?
A formulary system continually defines medication use practices within a healthcare organization using a multi-disciplinary, evidenced-based review process. Optimal formulary systems enhance patient safety, improve quality of care, and are used to help control costs. The resulting formulary defines medications approved for use, medication-use policies, important ancillary drug information, decision-support tools and organization guidelines.[1]
Organized healthcare systems often utilize a formulary system to drive standardization of safe and effective medication use practices across multiple hospitals. Interconnected Clinical Information Systems (i.e., EHR, CPOE) has proven to be crucial to the success of such initiatives. Most hospitals and health systems that participate in ACOs will have a developed and organized formulary system. Adapting similar systems to operate across an ACO care continuum would conceivably increase efficiencies and greatly benefit high quality, low cost objectives.
ACO formulary system responsibilities
The term “formulary system” no longer adequately describes the vast responsibilities connected with furthering safe and effective medication use practices. A broadened term such as “clinical policy development system” is likely to be considered more aligned with the future direction of healthcare. Nonetheless, formulary system will be used for the purposes of this document.
Responsibilities of an ACO formulary system include:
- Overseeing all aspects of medication use within the organization
- Supporting high quality, low cost objectives
- Reducing practice variations and improving efficiencies
- Optimizing use of clinical decision support tools likely to be part of the ACO infrastructure investment
Structured ACO formulary systems will be able to improve quality in areas that hospitals and healthcare systems have typically not adequately addressed. For example, research has shown that approximately 12 percent of patients go to an emergency department for treatment of an adverse drug event ADE. [2] Some of which are preventable. Emergency department patients with an ADE have a higher risk of spending additional days in the hospital and are more likely to have additional outpatient doctor visits. Over a six month period, such patients cost approximately 90 percent more than those without an ADE.2 A strategy to address preventable ADEs leading to emergency department visits would need to focus on outpatient medication management. An adequate ACO infrastructure would allow hospital and outpatient providers to communicate efficiently to develop such a strategy.
Formulary system management across the care continuum
Management of a formulary system across the care continuum requires understanding of two key principle.
- How are medications reimbursed? Medication reimbursement influences how formularies are created and maintained. The transition towards pay-for-performance systems will force formulary systems to adapt and evolve.
- What is the organization’s level of control over the formularies driving medication selection? Physician prescribing and patient access to drugs are directed by multiple formularies across the care continuum. In terms of managing an ACO formulary system, not all formularies are likely to be under internal control.
Medication use can be broken down into three categories: inpatient; outpatient, non-self administered drugs; and outpatient, self-administered drugs.
Inpatient. Inpatient applies to hospital services such as acute care, long-term acute care, and inpatient rehabilitation. In terms of Medicare reimbursement, the payment of hospital operating costs for these services is based on prospectively set rates that are adjusted for various factors (e.g., location, provision of indirect medical education, unusual expenses, patient characteristics, etc.). Since the rates are set, lowering hospital operation costs equals a greater profit margin. However, there is one exception. Critical-access hospitals are eligible for cost-based reimbursement from Medicare (i.e., cost + 1%).
Successful formulary system management identifies opportunity to minimize the pharmaceutical spend while optimizing clinical and operational value (i.e., pharmaceutical investment). In the case of medications that bring equivalent value, one agent is typically selected based on its ability to achieve associated value with the lowest investment. Such formulary streamlining not only minimizes spend and helps to control inventory costs, but is fundamental to the creation of safe and effective medication use practices. Internal experts are able to work together more efficiently when practice variability is first reduced.
Example strategies to minimize the pharmaceutical spend include:
- Formulary streamlining
- Optimizing hospital and GPO drug contracts
- Reducing drug waste
- Shifting prescribing patterns
- Accessing drug manufacturer patient assistance programs
Organizations have ultimate control over their inpatient formulary. As a result, drug selection can be influenced at the point of care and better drive standardized best practices (i.e., evidenced-based order sets with specific drug dosages, administration techniques, and safety warnings).
Outpatient, non-self administered drugs. Outpatient, non-self-administered drugs account for the limited number of outpatient prescription drugs that may qualify for Medicare Part B separate payment (i.e., separately payable drugs). Otherwise, drug payment is included (i.e., packaged) as part of the payment for the treatment during which the drug is administered. Similar to inpatient formulary management, selection of the most cost-effective medications is encouraged for packaged drugs. However, this reimbursement structure encourages selection of the most profit-effective formulary medications for separately payable drugs.
Medicare Part B payment criteria for outpatient prescription drugs:
- Furnished “incident to” a physician’s service
- Considered not usually self-administered
- Meets cost per day thresholds (i.e., $70 for 2011) or is granted pass-through status
- Not designated an “always packaged drug” (i.e., diagnostic radiopharmaceuticals, contrast agents, and implantable biologicals without pass-through status)
Factoring net reimbursement into outpatient drug selection could mean the difference between making money and losing money on separately payable drugs. Historically, the quest to improve profits has led organizations to sometimes promote significantly more expensive profit-effective drugs instead of less costly equivalent alternatives. CMS stakeholders are becoming increasingly aware of this flaw in the current reimbursement system. However, the 2011 Medicare Part B fixed payment rates continue to provide a competitive reimbursement advantage to pass-through drugs (i.e., small category of newer drugs) and separately payable drugs administered at physician offices. [3] 
ASP = Average Sales Price
In addition, CMS stakeholders are becoming increasing aware that the current reimbursement system provides a significant advantage to disproportionate share hospitals. A 2010 CMS report identified 44 percent of separately payable drugs to be paid at a rate below average acquisition costs by 0.6-11 percent for non-DSH hospitals. The same report conversely found 89 percent of the studied drugs to be paid at a rate above average acquisition costs by 1-222 percent for DSH hospitals.[4]
The advent of formal ACOs will influence the move towards greater physician integration. Hospital-employed or not, ACO internal experts will need to be integrated into the formulary system’s multi-disciplinary, evidenced-based review process. As ACO formulary systems evolve, hospital-based, primary care and specialty care physicians should become equally important to the success of achieving defined performance measures across the care continuum. Standardizing safe and effective outpatient non-self-administered medications will follow most inpatient management principles. Additional considerations include net reimbursement and input from outpatient primary care and specialty physicians.
In addition, normalizing drug costs across an ACO will make formulary drug selection more manageable. Aligning hospitals and physician offices to one group purchasing organization and wholesaler may be the most logical approach.
Outpatient, self-administered drugs. Outpatient, self-administered drugs are the majority of prescriptions filled by retail pharmacies. ACO formulary systems will not have control over prescription drug formularies. These are patient specific and controlled by the numerous prescription drug plans (i.e., Medicare Part D, Prescription Benefit Management Companies). Instead, formulary systems will impact high quality, low cost objectives by supporting safe and effective disease state management and driving solutions to optimize patient access to drugs. However, ACOs that provide outpatient pharmacy dispensing services to indigent patients or own employee benefit plans would oversee the associated drug formulary.
- Patient assistance programs. Programs that provide free drug to qualifying inpatients and outpatients. Drug manufacturer policies vary greatly in terms of available hospital replacement programs and Medicare recipient eligibility.
- Pharmacist-provided Medication Therapy Management Services.[5] MTM services can work with providers to ensure appropriate medication use, reduce medication-related adverse events, prevent hospital readmissions, and help manage chronic conditions.
Lack of internal control of the formulary changes how the formulary system influences prescribing. Shaping outpatient prescribing requires more focus on the communication of ACO-approved clinical practice guidelines and education. Prescribers more easily adopt use of guidelines if they are not only derived from evidenced-based medicine (i.e., controlled clinical trials), but include judgments of internal experts that apply the best available evidence for real clinical situations.[6] Above all, confirmed influence on performance outcomes is likely to have the biggest impact on guideline acceptance. An interconnected electronic health record across an ACO is part of a necessary infrastructure investment to monitor and improve quality. System data-mining would ideally allow ACO leaders to compare quality and financial outcomes of different physician practices for different diseases.
An interconnected e-prescribing system across an ACO could efficiently incorporate non-drug specific aspects of clinical practice guidelines. At the point of prescribing, however, drug selection must be patient specific and according to the patient’s health plan formulary. Most e-prescribing systems indicate whether a medication is covered under a patient’s health plan. This functionality is integral to optimizing ACO employee benefits by driving them to use preferred products as well.
Although not part of current e-prescribing technology, transparent access to retail pharmacy out-of-pocket drug costs would conceivably promote competition, drive down healthcare cost, and improve patient access to medications. The most cost effective retail pharmacy for a specific patient regimen would no longer be uncertain.
Current scenario
Written prescription — patient uses most convenient retail pharmacy
Written prescription — patient takes time to locate retail pharmacy with best drug prices despite benefits of using the same pharmacy
E-prescription sent directly to the patient’s preferred retail pharmacy without consistent knowledge of out-of-pocket costs
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Proposed scenario
E-prescription sent directly to the patient’s preferred retail pharmacy after review of out-of-pocket cost comparison of multiple local retail pharmacies; value of utilizing the same pharmacy is promoted by having the cost comparison based on the patient’s entire drug regimen.
ACO formulary system structure
Pharmacy and Therapeutics Committees currently manage the formulary systems of hospitals and healthcare systems. Committee recommendations are subject to approval by an organized medical staff and administrative review. [7-9] A similar leadership structure would need to be considered for an ACO. The below example would need customized to the healthcare delivery model, existing committees, and available resources.
Successful formulary system management across an ACO care continuum would support high quality, low cost objectives. Since safe and cost-effective medication use is a critical component to the provision of accountable care, this area warrants significant attention, planning, and investment.
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1. American Society of Health-System Pharmacists. ASHP guidelines on the pharmacy and therapeutics committee and the formulary system. Am J Health-Syst Pharm 2008;65:1272-83.
2. Hohl CM, Nosyk B, Kuramoto L, et al. Outcomes of emergency department patients presenting with adverse drug events. Ann Emerg Med 2011, Feb 25;[Epub ahead of print].
3. Centers for Medicare & Medicaid Services. Final changes to the hospital outpatient prospective payment system and CY 2011 payment rates. Federal Register, Vol. 75, No. 226, November 2010.
4. Wright S (Deputy Inspector General for Evaluation and Inspections). Memorandum report: payment for drugs under the hospital outpatient prospective payment system, OEI-03-09-00420. Department of Health & Human Services, October 2010.
5. Daigle L. ASHP policy analysis: pharmacists’ role in accountable care organizations. ASHP 2011:1-7.
6. Lator N. Evidenced-based guidelines: not recommended. Journal of American Physicians and Surgeons 2005;10(1):18-19.
7. BeQuette L, Jordan JK, Sheehan AH, Jorgensen JA. Medication formulary management in a large multihospital system. Am J Pharm Benefits 2010;2(5):319-323.
8. Government Accountability Office. VA drug formulary (GAO-10-776). August 2010:7, 11-14.
9. Reddan JG, Sheehan AH, Eskew J, Elmes G. Integration of a medication management infrastructure in a multihospital system. Am J Health-Syst Pharm 2004;61:2557-61.
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