US Medicaid drug formularies: do they work?

Does the use of a restricted drug formulary achieve cost savings within state Medicaid programmes? Restricted formularies are often justified by putting forth the attributes of a perfectly operating and implicitly costless policy. Analysis suggests, however, that the operation of 'actual' restricted formularies produce realised effects that are substantially at odds with the desired effects. Although the implementation of a restricted formulary can reduce a state's drug expenditures, service substitution causes expenditures to increase elsewhere in the system. Furthermore, direct savings in the drug budget are completely offset by these spillover effects.