A closed formulary approach points toward a significant market challenge for brand name drugs and reflects evolving demands on policies that aim to protect Medicaid by leveraging other payers. Revisiting the assumptions behind the program and exploring other options to secure a more predictable and constrained pattern in Medicaid prescription drug spending can benefit the lawmakers, according to an article in the AMA Journal of Ethics.

Authors described the Medicaid Drug Rebate Program (MDRP) and evaluated the efforts by Medicaid programs to contain drug costs including closed formularies and waivers. According to them, the MDRP extends manufacturer rebates to Medicaid programs for drugs used by beneficiaries. To qualify for such rebates, Medicaid programs must cover all of a manufacturer’s drugs approved by the US Food and Drug Administration with few exceptions, regardless of their cost or performance relative to other options, which is a drawback for Medicaid programs. Preferred drug lists are the drugs for which manufacturers offer supplemental rebates beyond the ones offered by the MDRP. 

As part of the cost-containment efforts, some states are participating in purchasing collectives, which help in the negotiation of net price concessions from manufacturers. In a similar cost-containment effort, New York has implemented a spending cap that allows the state’s Medicaid program to negotiate for additional rebates for a specific drug if overall drug spending exceeds a predetermined growth target. Closed formularies is part of such efforts by Medicaid programs to contain drug costs.

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According to the authors, a closed formulary would allow a Medicaid program to decline to cover certain drugs, increasing its negotiating leverage and controlling costs. However, these programs could pose the threat of exclusion to gain greater net price concessions from manufacturers. Restricted formularies were in effect in 19 of the 47 state Medicaid programs before the start of the MDRP. The authors stated that a review of studies from that period showed no huge savings from such restrictions. However, federal pricing and reimbursement policies have changed substantially since then.

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Even before the Medicaid programs started using the closed formularies, the rest of the market had already started to integrate this mechanism. Although this approach has brought health plans more negotiating power to obtain net price concessions in competitive classes of drugs, which would be transferred through to Medicaid, it is unclear as to what extent it has improved the ability to bring down the costs for drugs with minimal rebates, for which there are high demand and coverage protections. The authors also stated that applying more aggressive management strategies such as closed formularies may reduce access to some drugs and may increase the financial burden on patients with commercial, health exchange, or Part D plans that depend on closed formularies, which in turn may increase the number of people who will be eligible for Medicaid.

The authors conclude that the debate over closed formularies raises questions about the practicality of the commercially negotiated rebates as a strategy for controlling costs and the effects on Medicaid of the increasing payer restrictions in other sections of the market.


Ohn JA, Kaltenboeck A. Evolving Medicaid coverage policy and rebates. AMA J Ethics. 2019; 21(8):E645-653.