The Complete Guide to Formulary Management in Hospital Pharmacies

Managing medications in a hospital setting is more complex than ever. Rising drug prices, expanding treatment options, and growing regulatory expectations push hospitals to take a more strategic approach to medication selection and use.

Many see the formulary only as a list, but actually it is a clinical and operational framework that reduces unnecessary variations and strengthens the link between financial stewardship and frontline patient care. Whether you work in pharmacy leadership, serve on a pt committee, or are involved in budget planning or clinical quality initiatives, understanding how a formulary is developed and maintained is essential.

This formulary management complete guide brings clarity to a topic that often feels overwhelming.

Formulary management is the structured process of selecting, evaluating, approving, and monitoring medications used within a hospital or health system. It guarantees that each drug on the list has a clear clinical purpose, strong evidence behind it, and an appropriate cost-to-value ratio.

A hospital formulary supports:

• Standardized therapeutic decisions

• Better coordination across departments

• Safer medication practices

• More predictable spending

• Streamlined workflows for pharmacists and clinicians

This approach mirrors what health systems and managed care organizations have practiced for years: careful medication oversight that balances clinical benefit and financial responsibility.

A strong formulary protects both patients and the hospital. Without it, prescribing can become inconsistent, inventory difficult to control, and spending unpredictable. With it, hospitals gain clinical alignment and operational stability.

Key advantages include:

Improved Safety and Quality

A curated drug formulary reduces medication errors by limiting variation and promoting familiarity. Prescribers and nurses understand dosing, interactions, and administration details more clearly when working with a narrower set of well-vetted medications.

Better Financial Stewardship

Pharmacy spending can represent 10–25% of a hospital's operational budget. A well-maintained formulary helps hospital leaders forecast needs, leverage purchasing power, and reduce waste, aligning with how payers and pharmacy benefit managers approach cost control.

Let's just take a look at average annual savings by hospital size:

Greater Consistency in Clinical Decisions

Hospitals that rely on evidence-based formularies experience fewer treatment discrepancies. This leads to more predictable outcomes and smoother transitions across care teams.

Hospitals typically use one of several formulary structures, each with different levels of flexibility and control.

Open Formulary

An open formulary offers broad flexibility, giving clinicians options to prescribe a wide range of medications. While it supports individual provider preferences, it can lead to higher costs and more inventory complexity.

Some organizations refer to variations of this as open formularies, where most drug categories remain accessible but with clinical pathways guiding first-line choices.

Closed Forms

A closed formulary restricts prescribing to a defined list of approved medications. This model offers the strongest control over both quality and cost. Hospitals favor it when pursuing tight operational consistency or responding to rising drug spending.

Hybrid or Tiered Formularies

Tier structures can be adapted for hospitals as part of a health plan. Lower tier medications typically represent preferred, cost-effective options, while higher tiers may require justification or additional documentation.

Custom Formulary Models

Some systems rely on a custom formulary built around unique patient populations, clinical specialties, or value-based care goals. This approach can blend elements of open and closed systems to meet local needs.

Formulary decisions are never made by a single individual. They are shaped by a multidisciplinary group that balances clinical judgment with operational priorities.

Pharmacy & Therapeutics Committee

The pt committee oversees formulary development, medication evaluations, and policy updates. It acts as the central decision-making body.

Pharmacists

Clinical pharmacists analyze data, review literature, prepare assessments, and guide therapeutic discussions. Their expertise anchors the medication-evaluation process.

Physicians

Physician representation keeps clinical realities and frontline needs at the center of formulary changes.

Finance and Administrative Teams

These stakeholders must keep an eye on whether formulary decisions align with budget expectations and long-term planning.

Quality, Safety, and Regulatory Groups

Their involvement helps maintain alignment with accreditation standards, CMS expectations, and broader institutional policies.

Medication evaluation is a structured process grounded in clinical evidence and operational practicality.

Clinical Efficacy and Safety

Formulary drugs are reviewed for effectiveness, risk of adverse events, and relevance to the hospital's patient population. Comparative studies and guidelines inform these decisions.

Therapeutic Alternatives

Committees review whether existing options already meet clinical needs, avoiding duplication unless clear advantages exist.

Pharmacoeconomic Considerations

Hospitals weigh acquisition cost, overall value, and contribution to long-term outcomes, a process that parallels the work of a pharmacy benefit manager.

Operational Fit

Storage requirements, preparation time, compatibility with automated systems, and nursing workflows all play a critical role.

Medical Necessity and Utilization Controls

When a higher-cost option is required, structures similar to prior authorization or clinical justification may be used.

Hospitals that excel in formulary strategy focus on long-term consistency, cross-department alignment and learning from industry benchmarks.

Regular Review Cycles

Frequent formulary reviews makes sure that guideline updates, safety alerts, and new therapies are incorporated promptly. Leading organizations often refer to CVS Caremark formulary management capabilities as an example of systematic, evidence-based review conducted by a dedicated P&T Committee.

Clear Communication

Effective communication (via newsletters, intranet updates, and provider alerts) gives clinicians understanding of  changes and adhere to the formulary. 

Integration With Hospital Initiatives

Formularies should support major hospital programs, such as antimicrobial stewardship and chronic disease management. Hospitals often ask, “what are the formulary management capabilities of CVS Caremark?” as a benchmark for integrating utilization management tools, prior authorization workflows, and cost-effective coverage into their own systems.

Collaboration Across Departments

Including nursing, outpatient care, pharmacy, and administration ensures shared ownership of formulary decisions. This collaborative approach is the way  for changes to be clinically appropriate, operationally feasible, and effectively implemented across the organization.