Open vs closed formulary: The difference explained.

Formulary design does not get much attention until something goes wrong — a cost spike, a coverage gap, a member who cannot get the medication they were counting on. The choice between an open vs closed formulary shapes which drugs are covered, what members pay and how much leverage an employer actually has to manage pharmacy spend.

Most formulary designs are inherited rather than designed. Placement decisions get made by the PBM and employers rarely have full visibility into how or why. This guide explains how open and closed formularies work, where each model makes sense and what to look for when evaluating whether your current approach is the right fit for your organization.

Key highlights:

• A drug formulary is the official list of prescription medications covered under a health plan.
• Open formularies cover nearly all FDA-approved drugs with broad member access; closed formularies limit coverage to a defined list and require prior authorization for exceptions.
• Formulary structure directly influences employer drug spend, member out-of-pocket costs and the clinical outcomes a benefit plan can realistically achieve.
• Rightway's transparent PBM builds formulary strategy around clinical evidence and client savings, with 100% rebate pass-through, zero spread pricing and pharmacist-led clinical management.

What is a drug formulary?

A drug formulary is the official list of medications covered under a prescription drug benefit plan. It tells members and their prescribers which drugs are covered, at what cost and under what conditions.

Formulary drugs are covered under the plan's standard benefit structure. Non-formulary drugs are either excluded entirely or covered at a significantly higher cost-sharing level, often requiring a formal exception before the plan will pay.

Within the formulary, drugs are organized into tiers. Tier one typically includes generic medications with the lowest copays. Higher tiers cover preferred brand drugs, non-preferred brands and specialty medications, each with progressively higher member cost-sharing. The tier a drug sits in determines what a member actually pays at the pharmacy counter.

What is the difference between an open and closed drug formulary?

The fundamental difference between an open and a closed drug formulary is access. An open formulary covers nearly all FDA-approved medications. A closed formulary restricts coverage to a specific list of approved drugs and requires prior authorization or a formal exception for anything outside that list.

The drug pricing implications of each model run deep, from how much employers spend annually to how much friction members experience when trying to fill a prescription.

Here is how the two structures compare:

How to choose between an open and closed formulary.

Choosing the right formulary model is a business decision as much as a clinical one. The factors below map to real trade-offs your organization will face in every plan year.

1. Evaluate cost control and member access.

Cost control and member access pull in different directions. Open formularies reduce friction for members but make it harder to steer utilization toward lower-cost alternatives. Closed formularies create stronger guardrails, but only when paired with an exceptions process that is fast, fair and clinically grounded.

The real question is not which model looks better on paper. It is which model your PBM can actually execute. A closed formulary with poor clinical management produces member complaints and cost overruns. A transparent PBM with the right infrastructure can make either model perform.

To evaluate this factor, consider:

• How much of your drug spend is concentrated in specialty and high-cost categories
• Whether your current benefit design already includes tools that reduce unnecessary utilization
• Whether your PBM has in-house clinical staff to manage the formulary actively, not just a vendor network
• Your realistic threshold for how many member escalations your HR team can absorb

The goal is to cut pharmacy costs without creating access barriers that land back on your benefits team.

2. Assess your organization’s medication needs.

Population matters. An employer covering a high concentration of members managing chronic conditions like diabetes, cardiovascular disease or obesity has fundamentally different formulary priorities than one with a younger, healthier workforce. A formulary design that ignores population data is a formulary design built for someone else's employees.

GLP-1 coverage is a useful test. Employers covering GLP-1s under an open formulary without clinical criteria or utilization management are absorbing serious cost exposure. A closed formulary with clear eligibility criteria aligned to FDA-approved indications produces far better outcomes at a fraction of the cost.

To assess medication needs:

• Review your top drug categories by both spend and utilization, not just one
• Identify where clinically equivalent generics exist but are not being dispensed
• Understand your specialty drug exposure and which conditions are driving it
• Evaluate whether your current formulary reflects current clinical evidence or legacy coverage decisions that were never revisited

3. Consider administrative complexity and plan management.

Open formularies require less day-to-day management. Coverage decisions are largely automatic, exceptions are rare and the clinical oversight burden is minimal. For HR teams managing benefits alongside a hundred other priorities, that simplicity has real value.

Closed formularies require sustained effort, including prior authorization workflows, exception reviews and ongoing updates as new drugs enter the market. Employers who adopt a closed formulary without the right PBM infrastructure often end up with complexity and no savings and frustrated members on top of it.

Helping members understand what is covered and how to navigate the exceptions process is a real operational burden. Strong member benefits understanding reduces call volume, improves satisfaction and keeps escalations from becoming HR problems.

To evaluate administrative complexity:

• Determine how many formulary exceptions your current plan processes annually and how long they take
• Assess whether your PBM communicates proactively with members or waits for them to call
• Confirm what clinical review capabilities exist in-house versus outsourced
• Ask how often the formulary is reviewed, who initiates updates and how much advance notice employers receive

4. Align formulary strategy with clinical and financial goals.

The best formulary is the one built around what your organization is actually trying to achieve. If the goal is to reduce total pharmacy spend, the formulary needs to actively steer utilization. If the goal is strong member satisfaction and access, it needs to cover what members need without excessive friction.

Working with a fiduciary-aligned PBM is the most important factor in making formulary strategy work. A PBM earning revenue from retained rebates or spread pricing has financial incentives that do not align with your savings goals. Formulary design built around rebate volume looks like cost management. It is not.

To align strategy with goals:

• Define your primary objective: cost reduction, access, clinical outcomes or a combination
• Evaluate whether your PBM's revenue model creates structural conflicts with your formulary goals
• Confirm that formulary updates are driven by clinical evidence and net cost, not manufacturer negotiations
• Set measurable benchmarks like generic dispensing rate, adherence by condition and specialty cost per member, then hold your pharmacy benefits manager accountable

5. Work with a PBM that supports flexible formulary design.

Formulary design is not a commodity product. Every employer population is different and a formulary built around what generates the most rebate revenue for a PBM is not built for your members. Flexibility matters and it only exists when the benefits manager has no financial reason to steer you toward a specific design.

A truly neutral PBM brings no ownership stake in pharmacies, no retained rebates and no preferred manufacturer relationships influencing formulary placement. That independence is what makes genuine formulary customization possible.

To evaluate PBM flexibility:

• Confirm the vendor offers both open and closed formulary options with transparent tradeoff analysis
• Understand how formulary decisions are made and who has final authority over drug placement
• Ask whether the benefits manager supports custom clinical criteria for high-cost categories like GLP-1s and specialty drugs
• Clarify what monitoring tools exist to track formulary performance over time, not just at renewal

How a transparent PBM manages formulary to optimize cost and care.

A formulary is only as good as the management behind it. Most PBMs build a formulary at implementation and treat it as largely static after that. Your solution should treat the formulary as a tool that requires ongoing clinical review, data analysis and direct member engagement to actually deliver savings and outcomes over time.

1. Balancing cost control with clinical outcomes.

The tension between cost control and clinical quality is real, but it is manageable when the right processes are in place. A fiduciary-aligned partner starts with clinical evidence when evaluating drug placement — not rebate value — and applies utilization management tools where they reduce unnecessary spend without creating gaps in care. That means prior authorization criteria are based on clinical appropriateness, not just cost containment, and step therapy protocols reflect current treatment guidelines.

The result is a formulary that performs on both dimensions. Members get access to clinically appropriate medications and employers are not paying for drugs that have equivalent, lower-cost alternatives. Reducing PBM cost without compromising outcomes requires a clinical team that is actively involved in formulary decisions, not just available to answer questions when problems arise.

What this looks like in practice:

• Tier placement driven by therapeutic equivalence and net cost, not gross list price or rebate value
• Prior authorization criteria built on clinical guidelines, reviewed and updated as evidence evolves
• Step therapy protocols that reflect current standards of care, not outdated coverage rules
• Regular formulary review cycles that evaluate whether existing placements still reflect the best clinical and financial outcomes

2. Using data to guide formulary decisions.

Formulary decisions made without current data are decisions made on outdated assumptions. A high-performing PBM continuously monitors claim-level utilization, generic dispensing rates and population health trends to identify where the formulary is performing and where it is not. That analysis drives formulary updates — new drug approvals, patent expirations, shifts in prescribing patterns — before they become cost problems.

The goal is not just to report on what happened. It is to use data to get ahead of what is coming. When a new specialty drug enters the market or a biosimilar becomes available at significantly lower cost, a data-driven pharmacy benefits partner already has a plan for how to update the formulary and communicate the change to members and prescribers.

What strong data-driven formulary management looks like:

• Claim-level visibility into formulary performance across therapeutic categories, not just aggregate spend
• Ongoing analysis of generic dispensing rates by drug class and prescriber to identify steerage opportunities
• Proactive identification of off-formulary utilization patterns and the clinical or financial drivers behind them
• Market monitoring for new approvals, biosimilar launches and patent expirations that create formulary optimization opportunities

3. Managing rebates, pricing and drug selection.

In the traditional pharmacy benefits model, rebate negotiations and formulary placement are inseparable. Drugs get on the formulary because they generate revenue, and others get excluded not because they lack clinical value, but because a competitor paid more for the preferred position. In 2023, more than half of formulary exclusions by one of the largest PBMs had questionable medical and economic benefits to patients, according to research by the Global Healthy Living Foundation. When generic drug prices are inflated through spread pricing on top of that, employers are paying on two fronts without realizing it.

A transparent and aligned PBM removes those conflicts entirely. Rebates are passed through 100% to clients and documented at the claim level. Drug placement decisions are made independently of manufacturer relationships. Employers can see exactly what was paid, what rebates were earned and how formulary decisions were made.

What transparent rebate and pricing management looks like:

• 100% rebate pass-through with claim-level documentation, no retained rebates under any structure
• Zero spread pricing on every claim, with a single flat administrative fee as the only PBM revenue source
• Formulary placement decisions are made by a clinical team with no financial stake in which drugs are preferred
• Quarterly audit-ready reporting that gives employers full visibility into drug spend, rebates and net cost

4. Improving access while reducing unnecessary spend.

Improving member access and reducing unnecessary spend are not competing goals. The work is in identifying where members are not getting the medications they need and where spending is going toward drugs that have better, lower-cost alternatives. An aligned pharmacy benefits manager does both simultaneously through proactive clinical engagement rather than reactive customer service.

When a member is prescribed a non-formulary drug with a clinically equivalent formulary alternative, a proactive clinical team initiates the conversation rather than waiting for the member to hit a coverage wall at the pharmacy counter.

How active clinical management improves access and reduces unnecessary spend:

• Proactive member outreach when lower-cost formulary alternatives are clinically appropriate, before a fill is attempted
• Direct prescriber engagement to align prescribing patterns with formulary design and clinical guidelines
• Specialty medication management, including 99% copay assistance enrollment to reduce member out-of-pocket burden
• Prior authorization support that resolves requests quickly without creating unnecessary delays in care

5. Ensuring transparency in formulary design and updates.

Formulary transparency is not just about reporting. It is about giving employers the information they need to evaluate whether their PBM is actually doing the job. A formulary that changes without notice, uses tier structures that are difficult to audit or makes placement decisions that cannot be explained is a formulary that serves the vendor's interests more than the client's.

Transparent PBM solutions provide employers with full documentation of formulary structure, clear rationale for tier placement decisions and advance notice of any material changes. Formulary reviews are conducted as data-backed conversations between the benefits partner and the client, holding them accountable for the outcomes they promised.

What formulary transparency requires:

• Full documentation of tier placement criteria and the clinical and financial rationale behind each decision
• Advance notice of formulary changes with enough lead time for employers to communicate updates to members
• Employer access to claim-level data to independently verify that formulary decisions are delivering promised results
• Annual formulary reviews are structured as a two-way accountability conversation, not a one-way performance report

Support pharmacy formulary optimization with Rightway.

The Rightway PBM model makes formulary decisions based on clinical evidence and what is best for your plan — not on which manufacturer is paying the most. Our (Pharmacy and Therapeutics) P&T committee operates independently, with no rebate contracts influencing which drugs get preferred placement. No rebate traps. No spread pricing. Just a formulary strategy built around your members and your bottom line.

What that looks like for employers:

• Our P&T committee bases formulary placement decisions on clinical evidence and net cost. No manufacturer rebate contracts influence which drugs get preferred
• There is no spread pricing on any claim. What the pharmacy is paid is exactly what the client is charged
• Every rebate dollar generated by the formulary goes back to the client, documented at the claim level with full transparency
• Our pharmacist-led clinical team proactively engages members and prescribers to drive generic utilization, support adherence and reduce unnecessary spend

Book a demo today to see how Rightway’s transparent PBM can support pharmacy formulary optimization for your organization.