Behind the Prescription: Making Sense of Drug Approvals and Pharmacy Benefits

Prescription drug costs are one of the fastest-growing drivers of health plan spend. Employers read headlines about breakthrough therapies and new specialty drugs — and now more than ever, technology and venture capital funding are accelerating innovation. This is promising for individuals managing chronic disease, confronting a critical medical diagnosis, or turning to new options after other therapies have failed.

But what do we really know about the medications included in the formularies our pharmacy benefit managers (PBMs) design? The general goal of formularies is to provide access to appropriate therapy while promoting effective resource utilization. Are we asking the right questions to ensure resource optimization?

In today’s increasingly complex healthcare and benefits landscape, navigating what’s behind the prescription requires looking past surface data, rebates, and best-value claims. As with any investment, employers have a fiduciary responsibility to vet the approach used to create the selected formulary. That means examining how drugs are approved – is there an evidence-based review process by a Pharmacy and Therapeutics (P&T) committee that considers clinical efficacy, safety, and cost-effectiveness? Have utilization management tools like prior authorizations, step therapy, or quantity limits been adopted? Is there continuous monitoring through drug use evaluations to ensure safe, effective, and affordable patient care? How much flexibility does the plan sponsor have when determining its pharmacy offering?

Look Beyond the Label

When the Food and Drug Administration (FDA) approves a new drug, many assume it has been tested in large, rigorous trials with clear proof of effectiveness. The reality is more complicated. In recent years, especially in oncology and rare diseases, approvals have often been based on smaller studies, single-arm trials, or early results — such as tumor shrinkage — that suggest potential benefit but don’t necessarily show long-term outcomes like survival or quality of life.

This approval pathway allows certain drugs to reach patients faster, with the understanding that more studies will follow once the drugs are on the market. While this flexibility fosters innovation and access, it also means that some medications launch with limited data. For example, in oncology, several cancer drugs were approved based on early tumor response data, only to have those approvals withdrawn later when follow-up trials failed to confirm improved survival.

There is a balance to strike. Innovative treatments are essential to help people thrive and to address the serious illnesses and chronic conditions that drive up health plan utilization, employee out-of-pocket costs, and employer premiums. But we need to ask more questions. We need to understand where pharmacy dollars are going so we can make informed coverage decisions.

Understanding the Formulary Puzzle

PBMs design formularies, lists that determine which drugs are covered and how they’re tiered. But formulary decisions are not driven by science alone. Rebates and financial arrangements influence which drugs get favorable placement. Employers need to know if their PBM is recommending drugs because they provide the best value or because they generate the biggest rebate and manufacturer admin fees.

A study by the National Pharmaceutical Council found that only 30% of employers fully understand their PBM contracts, and 40% fully understand performance guarantees, which adds up to a costly knowledge gap.

PBM Due Diligence

Just as you would review a benefits contract line by line, drug coverage decisions demand due diligence. Here are questions to consider when talking with your PBM or benefits consultant:

• Evidence standards: What clinical evidence is required for formulary placement? How are drugs with Accelerated Approvals or small patient populations handled?
• Comparative value: When there are studies that directly compare two drugs, does that information affect which drugs make the list? And as new research comes out, do you update where those drugs are placed?
• Net cost versus rebates: Are formulary decisions driven by lowest net cost or by highest rebates? Can you show examples where rebate-driven placement has decreased total spend?
  Transparency: What portion of rebates, administrative fees, and manufacturer payments are passed through to the plan?
• Utilization management: Do the rules that require patients to get approval before taking certain drugs, or to try less expensive drugs first, match the medical evidence? And are there protections in place to make sure lower-cost options like generics and biosimilars are available when they’re equally or more effective? Or are higher cost medications approved when rebates bring the total cost equal to or below the expense of their lost cost alternative?
• Member impact: How do you handle programs that change how manufacturer coupons or assistance are applied — and how does that affect what employees actually pay out of pocket?

Fiduciary Responsibility — and Opportunity

Employers have a fiduciary responsibility to act in plan participants’ best interests. That means looking beyond appealing discounts or rebates and ensuring formulary design truly supports value and employee health.

The FDA approval process isn’t always straightforward, but employers can cut through the complexity by asking tough questions and approaching formulary design with the same scrutiny they would give any major investment. In the end, we all want to safeguard employee health and ensure that every pharmacy dollar is working as hard.

About Health Action Council 
Health Action Council is a not-for-profit 501(c)(6) organization representing mid-and large-size employers that enhance human and economic health through thought leadership, innovative services, and collaboration. It provides value to its members by facilitating projects that improve the quality and moderate the cost of healthcare purchased by its members for their employees, dependents, and retirees. Health Action Council also collaborates with key stakeholders – health plans, physicians, hospitals, and the pharmaceutical industry – to improve the quality and efficiency of healthcare in the community.