US Medicaid drug formularies: do they work?

Area of Science:

• Health Economics
• Public Health Policy
• Pharmaceutical Policy

Background:

• State Medicaid programs often implement restricted drug formularies to control costs.
• These policies are typically justified by assumptions of efficient and cost-free operation.
• However, the real-world impact of these formularies requires careful examination.

Purpose of the Study:

• To evaluate whether restricted drug formularies achieve actual cost savings in state Medicaid programs.
• To analyze the unintended consequences and spillover effects of implementing restricted formularies.

Main Methods:

• Analysis of cost data within state Medicaid programs.
• Examination of drug expenditures and overall healthcare spending.
• Assessment of service substitution patterns resulting from formulary restrictions.

Main Results:

• Implementation of restricted formularies can lead to a reduction in direct drug expenditures.
• Significant increases in healthcare expenditures occur elsewhere in the system due to service substitution.
• The observed spillover effects completely offset any initial savings in the drug budget.

Conclusions:

• Restricted drug formularies in state Medicaid programs do not appear to generate net cost savings.
• The policy's intended financial benefits are undermined by increased costs in other service areas.
• Policymakers should consider the full system impact, including service substitution, when evaluating formulary restrictions.