Formulary vs. Preferred Drug List

What Matters for Hospitals

Hospitals today face a maze of medication lists and insurance requirements. Two terms often causing confusion are formulary and preferred drug list (PDL). Both relate to which medications are available or covered, but they aren’t exactly the same. In 2025’s high-cost healthcare landscape, understanding the difference – and why it matters – is crucial for hospital administrators and pharmacy leaders. Below we break down formulary vs. PDL, how they differ, and why aligning the two is increasingly important for hospitals’ finances and patient care.

Formulary vs. Preferred Drug List – Understanding the Terms

A formulary is essentially an approved medication list. According to the Academy of Managed Care Pharmacy, a formulary is “a continually updated list of medications... supported by evidence-based medicine” whose primary purpose is to encourage use of safe, effective, and affordable drugs. In other words, it’s a compilation of drugs that an organization (like a hospital or insurer) prefers to use because they work well and are cost-effective. Hospitals maintain their own hospital formularies – lists of drugs that the pharmacy stocks and physicians can prescribe in that facility. These are managed by Pharmacy & Therapeutics (P&T) committees of doctors and pharmacists who regularly review new drugs to keep the formulary current.

A Preferred Drug List (PDL), on the other hand, usually refers to an insurer’s list of preferred medications. It’s often used by health plans (including Medicaid or pharmacy benefit managers) to highlight drugs that are covered on the most favorable terms. For example, a state Medicaid program defines a PDL as a list of outpatient drugs that helps prescribers and patients choose safe, effective, lower-cost options; drugs on the PDL have fewer access restrictions, while non-preferred drugs typically require prior authorization. In practice, a PDL is often a subset of a plan’s full formulary – the formulary may include many drugs, but only some are “preferred” because they are most cost-effective or clinically recommended. Each insurance plan still maintains a comprehensive formulary (list of covered drugs) beyond the PDL, for those drugs not on the preferred list.

It’s worth noting that the terms sometimes overlap. Some insurers use “formulary” and “preferred drug list” interchangeably to refer to their covered drug list. The key distinction is that “preferred” drugs are typically the first-line choices (often generics or best-value brands) while non-preferred ones might be covered under stricter conditions. Hospitals generally use the term formulary for their internal list, whereas PDL is commonly used by payers. Understanding this context helps avoid confusion when coordinating patient care across hospital and outpatient settings.

Key Differences Between a Hospital Formulary and an Insurer’s PDL

While both a hospital formulary and an insurance PDL serve to promote effective and cost-conscious medication use, there are important differences in scope and purpose:

• Governing Body & Decision Makers: A hospital formulary is managed by the hospital’s P&T committee, comprised of physicians, pharmacists, and other experts who decide which drugs to stock based on clinical evidence and need. In contrast, an insurer or government PDL is set by the payer’s pharmacy committee or a state Medicaid Drug Formulary Committee, often aiming to maximize value across a broad population.

• Scope of Drugs Included: Hospital formularies can include all medications used in that hospital (including specialized injectables or inpatient-only drugs). An insurance PDL typically covers outpatient prescription drugs and may exclude hospital-administered drugs or highly specialized therapies. For instance, Medicaid PDLs focus on pharmacy-dispensed drugs, whereas hospital-only medications might not appear on those lists.

• Preferred vs. Non-Preferred Status: Within an insurer’s formulary, drugs are divided into tiers – “preferred” drugs (often tier 1 or 2) have lower copays and fewer hurdles, while non-preferred drugs are higher tier (costing more or requiring prior authorization). A hospital formulary isn’t tiered by cost to the patient, but it may include notes on preferred agents (e.g. recommending one antibiotic over another) and may restrict certain high-cost drugs to specialist use or require approval before use.

• Purpose and Use: Both lists aim for safe, effective therapy at the best cost, but their vantage points differ. Hospitals use formularies to guide in-house prescribing, standardize care, and manage pharmacy budget impact. Insurers use PDLs to control which drugs they will pay for (and at what level), steering providers toward cost-effective choices in outpatient prescriptions. In essence, the hospital formulary is about what the hospital provides to patients, while the PDL is about what medications patients’ insurance will cover affordably.

Despite these differences, there is significant overlap: many of the same medications deemed safe and effective will appear on both a hospital’s formulary and a payer’s preferred list. Both tools exist to promote the use of proven therapies and avoid waste on ineffective or overly costly drugs. The challenge comes when a drug is on one list but not the other – for example, the hospital might stock a certain high-cost drug that a patient’s insurance classifies as non-preferred (or not covered at all). That’s where alignment becomes important.

Why This Matters for Hospitals in 2025

In 2025, the pressure to manage medication costs and ensure patient access is higher than ever. Drug prices have been rising dramatically, straining hospital budgets and patient affordability. Recent data highlight the challenge: Between 2013 and 2015, average inpatient drug spending per admission jumped nearly 39% (from $714 to $990). Hospital pharmacists also report that drug costs now consume up to 80% of their pharmacy budgets – a startling figure that leaves only 20% for staffing and other costs. Nearly all hospitals say that rising drug prices hurt their ability to manage overall costs

New drug therapies are debuting at unprecedented prices while existing drug costs climb faster than inflation. As shown in the above infographic (American Hospital Association, 2024), the median annual list price for new drugs launched in 2023 hit $300,000 – a 35% increase from the prior year. At the same time, drug shortages reached a decade high, adding up to 20% extra in drug expense for hospitals managing scarce medications. These trends underscore why hospitals must be extremely strategic with their formularies. Ensuring that preferred, cost-effective drugs are used whenever possible is essential to maintain care quality and financial stability in this high-cost environment

Aligning formularies with PDLs is also a growing concern. Patients move in and out of hospitals, and continuity of care means the medications started in the hospital should remain accessible afterward. If a hospital’s formulary choices don’t take into account common insurance PDLs, patients could face coverage denials or high out-of-pocket costs once they’re discharged. For example, if a patient is stabilized on a new expensive anticoagulant in the hospital that isn’t on their insurer’s preferred list, they might encounter hurdles filling it later. Such mismatches can lead to therapy disruptions – precisely what unified PDL policies seek to avoid. In fact, many state Medicaid programs in the 2020s have implemented single statewide PDLs for all managed care plans to streamline therapy choices. Minnesota’s Medicaid, for instance, requires all plans to use the state’s uniform PDL so that when patients switch plans, their drug regimen isn’t disrupted; this move encourages use of the most cost-effective drugs and simplifies things for prescribers and pharmacies. (Each plan can still cover additional drugs beyond the PDL in its broader formulary, but the core preferred list is aligned.) Hospitals treating Medicaid patients have to be aware of such lists to ensure smooth transitions in care.

Finally, value-based care and reimbursement trends in 2025 make formulary decisions even more impactful. Insurers are increasingly tying payments to outcomes and cost-efficiency. If a hospital consistently chooses drugs that are off-plan or non-preferred, it may face higher denial rates or not fully receive bundled payments. Conversely, choosing medications that are on a patient’s insurance formulary (when clinically appropriate) can improve adherence and reduce readmissions, benefiting both patient outcomes and hospital performance metrics. In short, the formulary vs PDL issue is no longer academic – it directly affects patient care continuity, hospital reimbursement, and overall cost of care.

Aligning Hospital Formularies with Preferred Drug Lists

Given the above, hospital pharmacy leaders are focusing on better alignment between their formularies and major payer preferred lists. This doesn’t mean letting insurers dictate clinical decisions, but rather finding the overlap that benefits both clinical efficacy and financial sustainability. Some best practices include:

• Representation and Communication: Involve experts familiar with payer formulary trends in the hospital P&T committee. Many integrated health systems now share data on which medications are commonly preferred by payers to inform hospital formulary updates. For example, if multiple insurance plans prefer Drug A over Drug B for a given condition (due to better pricing or outcomes), a hospital might consider making Drug A its first-line choice as well – as long as clinical outcomes are equivalent. Early communication with patients’ insurers (or using electronic formulary check tools) during hospital care can flag if a planned discharge medication isn’t covered, allowing substitutions before the patient leaves.

• Formulary Restrictions and Guidance: Hospitals can use formulary policies to guide prescribers toward preferred options. This might include therapeutic interchange protocols (automatically substituting a preferred drug for a non-preferred one, if equivalent) or requiring justification to use non-formulary medications. These policies mirror what insurers do with prior authorizations. By implementing them in-house, hospitals encourage use of medications that will likely be covered for the patient later. As one industry analysis noted, systems with rules-based formulary controls (like auto-substitution) help drive compliance at the time of prescribing, preventing costly deviations.

• Education and Clinical Decision Support: Doctors may not always know offhand which drug is on which insurance formulary. Integrating PDL information into electronic health records or prescribing systems can alert physicians if they’re ordering a non-preferred medication. Educating the medical staff on key differences (for instance, informing them that “Drug X is preferred on most of our patients’ plans whereas Drug Y often requires a special approval”) can influence prescribing habits in a positive way. Aligning on common choices benefits patients – they’re less likely to face delays or pay out-of-pocket for a therapy started in the hospital.

Ultimately, the goal is not to let insurance considerations override patient care, but to choose cost-effective therapy when it’s equally effective clinically. In many cases there are multiple good options for treatment; if one is on both the hospital formulary and the insurer’s PDL, that’s a win-win. Hospitals that proactively coordinate formularies with prevailing PDLs make it easier for doctors to “do the right thing” – i.e. prescribe a medication that the patient can obtain and afford after discharge. This alignment improves adherence, reduces readmission risk (since patients continue their meds), and avoids wasted expense on drugs that end up being switched later.

Data-Driven Formulary Management: A Turnkey Solution

Managing a formulary in 2025 is a dynamic, data-heavy task. Hundreds of new medications are approved each year, pricing and rebate contracts are constantly changing, and each payer updates its preferred list regularly. Keeping up manually – checking every new drug or tracking multiple insurers’ formularies – is nearly impossible. This is where technology and data analytics come in. In fact, leveraging advanced tools is now considered essential for effective formulary management. By using software and data platforms, hospitals can intelligently aggregate information on drug efficacy, costs, and coverage to make better decisions.

For example, analyzing internal usage data alongside external benchmarks can reveal which high-cost drugs have cheaper but equally effective alternatives. A robust system might check a prescribed medication against the patient’s insurance PDL in real-time, flagging if an alternative could avoid a prior authorization. As MedReb8’s own experience shows, “analyzing and reviewing all the different sources of data is one of the most challenging parts of formulary management. Utilizing technology is essential to optimizing formulary decisions efficiently and accurately.” In other words, smart platforms can crunch the numbers and generate actionable insights much faster than humans alone.

One powerful approach is pharmaceutical data aggregation. This means pulling in data from multiple sources – clinical studies, drug price databases, hospital purchasing records, insurer formularies, etc. – into one view. With the right analytics, such aggregated data can highlight opportunities to save. Notably, hospitals may uncover previously unclaimed drug rebates or pricing deals. (Many medications have manufacturer rebates or 340B discounts that require tracking to capitalize on.) A data-driven system can identify where the hospital could be getting money back. Indeed, by using data aggregation, hospitals have increased revenue by finding unclaimed rebates and optimizing purchase contracts. These savings directly contribute to the bottom line and can offset the ever-growing drug expenses.

MedReb8’s Pharmacy Formulary Management platform is an example of a turnkey solution that leverages these technologies. It provides hospitals with a comprehensive, up-to-date dashboard for formulary decision-making – integrating evidence-based recommendations, cost metrics, and payer coverage information into one tool. By automating the heavy data lifting, such a platform frees up hospital pharmacists to focus on patient care rather than paperwork. Trends like prior authorization requirements, step therapy rules, or new preferred drug announcements can be tracked and updated in real time. The result is a formulary that’s continuously optimized: clinically sound, cost-conscious, and aligned with current insurance landscapes.