A managed drug formulary evaluates each newly approved medication for clinical effectiveness, safety, and cost before assigning it a coverage category. An open drug formulary, by comparison, generally covers a broad range of eligible prescription medications beyond a small subset of high-cost specialty drugs.
Choosing between a managed vs. open drug formulary comes down to how employers balance prescription drug cost control with employee access to medications.
Neither model is automatically the better choice. The right approach depends on an employer’s claims experience, workforce medication needs, benefits budget, and desired level of coverage flexibility. As a result, employers should weigh these factors to determine which formulary best supports their overall group benefits plan management and cost-containment.
On this page
What is a Drug Formulary in a Canadian Group Benefits Plan?
A drug formulary is the list of prescription medications eligible for reimbursement under a group benefits plan, and the type of formulary determines how broadly or narrowly that coverage extends.
Every employer-sponsored drug plan in Canada operates with some version of this list, whether the employer has actively chosen one or is using the insurer’s default.
Depending on the insurer, a Pharmacy and Therapeutics (P&T) committee or another clinical review panel is typically the body responsible for evaluating drugs for formulary inclusion on the private plan side.
This committee, typically composed of pharmacists, physicians, and clinical consultants, reviews each drug’s clinical effectiveness, safety profile, therapeutic advantage over existing covered alternatives, and cost. The committee’s recommendations determine how a drug is categorized within the formulary (Source).
That said, formulary type is an important prescription drug plan design decision that the employer makes in consultation with their insurer or benefits advisor. It is not a fixed feature that comes automatically with every group plan.
Employers may be able to review or adjust their formulary arrangement as part of ongoing plan management, particularly when reviewing prescription drug coverage, evaluating plan performance, or preparing for renewal. Any changes depend on the options their insurer offers and the terms of the group benefits contract. The two common formulary models available to Canadian employers are managed drug formularies and open drug formularies, though insurers may also offer tiered, restricted, or other custom arrangements.
The sections that follow explain how each model works, compare them across the dimensions that matter most to employers, and provide a framework for choosing between them.
How Do Managed and Open Drug Formularies Differ?
A managed formulary strengthens cost controls by evaluating each drug before assigning coverage, while an open formulary generally provides broader coverage without a separate clinical review.
As a result, managed formularies offer more control over drug costs but may involve prior authorization or step therapy. Open formularies, whereas, give employees greater access to medications with fewer formulary-based restrictions but may expose employers to higher claims costs.
The following table summarizes how managed and open formularies differ across the dimensions most relevant to Canadian employers:
| Feature | Managed Formulary | Open Formulary |
|---|---|---|
| Coverage default for newly approved drugs | Evaluated and categorized before coverage is assigned | Covered as a full benefit unless individually flagged |
| Scope of prior authorization | Can apply under either formulary type; managed formularies often add further criteria, such as step therapy or indication-based review, on top of standard authorization. | May apply to selected drugs, including certain specialty or high-cost treatments; the exact scope depends on the insurer and plan. |
| Employer cost exposure | May lower eligible drug spending over time by directing coverage toward clinically appropriate, cost-effective alternatives | Higher claims costs due to unrestricted access to new, often expensive drugs |
| Employee access friction | Some drugs require prior authorization or step therapy | Minimal friction for most prescriptions |
The following sections explain how each formulary works and what its advantages and limitations mean for employers and employees:
How Does a Managed Drug Formulary Work?
A managed formulary relies on clinical and cost-effectiveness criteria to assign drugs to a coverage category that determines whether and how the plan reimburses them. The specific review process, coverage categories, and timing of these assessments vary by insurer and formulary design.
In other words, rather than automatically covering all drugs that Health Canada has authorized for sale, a managed formulary requires each medication to clear a second evaluation before it becomes a plan benefit.
A managed formulary may also use step therapy for certain drug classes. This requires members to try a lower-cost, clinically established treatment before the plan reimburses a higher-cost alternative. If the first treatment does not produce the desired clinical outcome, the member may qualify for the alternative through a claims-history review or prior authorization.
Advantages and limitations of managed drug formulary for both employers and employees:
| Advantages | Limitations | |
|---|---|---|
| For employers | Formulary-level cost management. Clinical reviews and coverage criteria provide additional cost controls that can complement measures such as generic substitution and biosimilar-first policies. | Greater administrative complexity: formulary changes, employee communications, and transition planning require more hands-on management. |
| For employees | Can reduce out-of-pocket costs in some cases by directing coverage toward lower-cost alternatives. | Reduced flexibility: some medications may require prior authorization, and employees may need to try a preferred alternative before the plan covers their first-choice drug. |
Key Takeaways for Employers:
- For employers facing rising drug costs, high specialty drug concentration, or stalled generic adoption, a managed formulary adds a layer of cost governance that point-of-claim controls alone cannot provide.
- The trade-off is a more complex employee experience for the subset of plan members whose medications are subject to formulary restrictions.
How Does an Open Drug Formulary Work?
An open formulary typically provides broad coverage for eligible prescription drugs without requiring a separate clinical evaluation before a drug is added to the plan, though prior authorization, exclusions, and other plan conditions may still apply.
This gives plan members wider access to medications, often at the cost of higher overall plan spending, which is why this model remains a common formulary type among Canadian group benefits plans.
Under an open formulary, when Health Canada approves a new drug, that drug may become eligible for coverage without going through the same formulary-level review used under certain managed plans. Whether and when it’s actually added to the plan, and whether it becomes reimbursable, still depends on the insurer’s own drug listing rules, exclusions, authorization requirements, and the specific terms of the employer’s benefit contract.
That said, Health Canada’s approval on its own does not guarantee reimbursement. Actual coverage still depends on the plan’s specific eligibility rules and conditions, so being on the list doesn’t automatically mean every claim will be paid.
However, some high-cost specialty drugs used to treat conditions such as rheumatoid arthritis, cancer, or rare diseases may still require prior authorization.
Advantages and limitations of open drug formulary for both employers and employees:
| Advantages | Limitations | |
|---|---|---|
| For employees | Broad medication access. Employees and their physicians have greater flexibility in prescribing decisions, with fewer formulary-based restrictions for most medications. | Less direction toward lower-cost alternatives through formulary reviews. |
| For employers | Simplicity in administration and communication. Fewer denied claims, less employee confusion, easy to explain during recruitment. | Fewer formulary-level cost controls. Higher-cost medications may increase claims spending, while cost management relies on other plan provisions such as coinsurance, deductibles, maximums, and generic substitution. |
Key Takeaways for Employers:
- For employers who value straightforward plan design and want to minimize employee friction, an open formulary delivers on both counts.
- The trade-off is that an open formulary may provide fewer controls over which medications are reimbursed, and the employer has limited tools to manage which drugs drive spending at renewal.
Note: employers with employees based in Québec should also check that whichever formulary they choose still meets the province’s minimum drug coverage requirements set by RAMQ, including the provisions around exceptional medications under its public plan (Source).
A formulary that works fine elsewhere in Canada may need to be adjusted to stay compliant for Québec employees, so it’s worth confirming with the insurer before making a switch.
How Should Employers Decide Between a Managed and Open Drug Formulary?
Choosing a drug formulary model is not a one-size decision. It depends on the employer’s financial position, the health profile of their workforce, how much administrative involvement they are prepared to take on, and what they expect from their drug plan over the next three to five years, not just the next renewal.
Some employers may find that an open formulary better supports their coverage needs, while others may benefit from the additional cost controls of a managed formulary.
When Might a Managed Drug Formulary Be the Better Choice?
A managed formulary may be a stronger fit for employers facing rising prescription drug costs or looking for more structured control over medication coverage.
Prescription drug spending is increasing, and existing controls are not keeping pace. When renewal reports show drug spending consistently outpacing inflation, health trends, or budget capacity, existing controls (such as coinsurance and deductibles) may not be enough.
This is especially relevant when cost per claim rises faster than utilization, suggesting the plan is paying more for a similar volume of prescriptions. In this situation, a managed formulary adds another layer of cost control by evaluating which medications are covered and under what conditions.
The employer wants formulary-level cost management alongside existing plan controls. Coinsurance and deductibles manage how the cost of a claim is split between the plan and the employee. A managed formulary manages which drugs generate claims in the first place. These tools are complementary and can provide cost control at different stages of the claims process.
The insurer provides clear exceptions and useful reporting. A managed formulary is only as effective as the infrastructure supporting it. Employers should consider this model when their insurer provides clear, well-documented clinical exception pathways (so employees with legitimate non-formulary needs are not left without recourse), along with regular drug utilization and spending reports that allow the employer to monitor the formulary’s impact over time.
The employer wants to manage plan costs while maintaining appropriate safeguards for employees with specific medication needs. The goal is to apply clinical evaluation to the coverage decision so that high-cost claims are supported by clinical evidence. Where appropriate, lower-cost alternatives are considered, while employees who genuinely need a non-formulary drug have a defined pathway to obtain coverage.
For employers who are willing to invest in the communication and administrative effort required, a managed formulary delivers that balance more precisely than an open model can.
When Might an Open Drug Formulary Be the Better Choice?
The following situations describe employers for whom the open model may deliver the best balance of employee experience, plan simplicity, and operational fit:
The employer places a high value on broad medication access. Some organizations view prescription drug coverage as a core element of their compensation and recruitment strategy.
For these employers, the simplicity of an open formulary reinforces their benefits positioning without requiring employees to navigate formulary tiers or authorization requirements.
The workforce has diverse and complex prescription medication needs. Employer groups with a wide range of chronic conditions, multi-drug regimens, or employees seeing multiple specialists may find that an open formulary produces fewer coverage disruptions.
The employer wants to avoid disrupting employees on established treatments. Formulary transitions affect employees already taking medications more than they affect new hires joining the plan for the first time.
For employers whose workforce includes a significant number of employees on stable, long-term prescriptions, particularly for chronic conditions like diabetes, cardiovascular disease, autoimmune disorders, or mental health, maintaining an open formulary avoids the transition communications and potential clinical disruptions that accompany a managed switch.
The benefits budget can accommodate the desired level of coverage flexibility. An open formulary may involve higher drug spending than a managed alternative, but this may be acceptable if the employer has sufficient budget capacity and manages costs through other plan design measures.
What Factors Should Employers Evaluate Before Choosing a Drug Formulary?
After identifying which formulary model may better fit their priorities, employers should evaluate the decision using their own claims data and plan requirements. The following six factors provide a structured way to assess both options:
1. Current drug spending
Start with the numbers. Employers should review two to three years of prescription drug claims data, where available, to understand their plan’s baseline spending, year-over-year growth rate, and the categories driving the largest share of costs.
Key metrics include:
- Total eligible drug costs
- Cost per claimant
- The split between generic and brand-name spending
- The concentration of high-cost claims
If a small number of claimants are responsible for a disproportionate share of drug spending, formulary-level management may offer more opportunities for cost control than adjustments to coinsurance or deductibles alone.
2. Workforce medication needs
The clinical profile of the plan population matters as much as the financial profile.
Employers should assess the most common medication categories claimed under their plan, the prevalence of chronic conditions requiring ongoing prescriptions, and whether specialty drug utilization is present or emerging.
A workforce with high specialty drug concentration presents a different cost-management challenge than one where most claims are for common generics. The formulary choice should reflect the actual medication needs of the employer’s workforce, not the industry average.
3. Coverage flexibility
This factor captures the employer’s philosophy around employee choice.
Some employers view broad medication access as a non-negotiable element of their benefits offering. Others are comfortable directing coverage toward preferred alternatives, provided clinically appropriate exceptions are available.
There is no objectively correct position. Employers should understand the cost implications of each approach and decide how much flexibility they want their plan to provide. Those prioritizing broader access should also consider whether the associated drug spending fits their benefits budget.
4. Clinical exceptions
Before selecting a managed formulary, employers should understand exactly how non-formulary drug requests are handled. Important questions include:
- What clinical criteria does the insurer apply?
- How long does the review take?
- What documentation is required from the physician?
- What happens if the request is denied? Is there an appeal process?
- What grandfathering provisions are available for employees already taking a medication that is reclassified?
That said, a clear and accessible exception process is essential to maintaining medication access for employees with specific clinical needs.
5. Financial impact
Projected savings from a managed formulary should be examined with the same rigour an employer would apply to any other financial projection. Employers should ask for the insurer’s or advisor’s estimate of annual savings and the assumptions behind it, including:
- Which drugs are expected to shift coverage categories?
- What switching rates are assumed?
- What exception approval rates are built into the estimate?
- How implementation costs, including employee communications and transition support, affect net savings?
Savings that look compelling in a proposal may be less significant once the assumptions are tested against the employer’s actual claims data and implementation costs.
6. Plan sustainability
The formulary decision is not a one-year calculation. Employers should evaluate whether the proposed plan design supports long-term affordability. This means it can absorb reasonable cost growth without requiring disruptive benefit reductions at future renewals.
At the same time, the plan should maintain a level of employee access that keeps it competitive as a recruitment and retention tool. A plan that saves money in year one but generates employee dissatisfaction or coverage gaps has not necessarily achieved long-term sustainability.
Briefly, the strongest formulary choice is the one that balances the plan’s cost trajectory with the quality of medication coverage over a multi-year period.
Managed vs. Open Drug Formulary: Employer Decision Matrix
The table below maps common employer priorities to the formulary model most likely to address them. It is designed as an initial orientation tool to identify where to focus the analysis, not a substitute for reviewing claims data and actual insurer coverage provisions.
| Employer priority | Option to investigate |
|---|---|
| Broader medication choice with minimal employee friction | Open formulary: generally covers a broad range of eligible medications with a valid DIN, subject to plan exclusions, reimbursement limits, and authorization requirements; no formulary tiers or prior authorization for most drugs |
| More formulary-level cost management | Managed formulary: adds preferred-drug protocols, prior authorization, and clinical review to the plan’s cost-management toolkit |
| Greater flexibility for employees with complex medication needs | Open formulary, or a managed formulary with robust clinical exception provisions. The key variable is the strength and accessibility of the insurer’s exception process |
| More structured preferred-drug selection | Managed formulary: directs coverage toward drugs evaluated by the insurer’s P&T committee as clinically effective and cost-appropriate |
| Balancing cost control and medication access | Managed formulary with appropriate exceptions and safeguards: the managed model provides cost governance while preserving access for employees who need non-formulary drugs for clinical reasons |
| Simplicity in plan administration and employee communication | Open formulary: fewer coverage classifications, fewer denied or redirected claims, and a simpler message to communicate during onboarding and enrollment |
| Reducing exposure to high-cost specialty drug claims | Managed formulary: prior authorization for specialty drugs is the primary tool for verifying clinical necessity before the plan absorbs high-cost claims |
The matrix above reflects the general tendencies, not guarantees. The right choice depends on the employer’s claims history, workforce medication needs, budget, and the insurer’s actual plan provisions.
Before switching, as an employer, you should ask the insurer or employee benefits advisor to compare both options using their own claims data, including the expected savings, coverage changes, exception process, and potential impact on employees.
How to Audit Your Drug Claims Before Choosing a Formulary
The common advice employers get when evaluating formulary options is “review your claims data with your advisor.” That is sound, but it skips over a more useful question: what specifically should you look for, and how do you know whether what you find points toward a managed formulary, an open formulary, or the plan design you already have?
Before meeting with your insurer or consultant, you can build a much clearer picture of your plan’s needs by answering five questions:
Question 1: What Is Your Specialty Drug Concentration?
Specialty drugs are an important driver of prescription drug spending and a key area to examine when comparing formulary options.
What to ask your insurer: Break out the percentage of your plan members using specialty drugs and the percentage of total spend those claims represent.
What the answer tells you: If a small number of your claimants are driving a disproportionately large share of your costs, a managed formulary’s PA and step-therapy mechanisms may be directly relevant. They can help evaluate high-cost drugs against coverage criteria and identify appropriate alternatives, rather than automatically covering every prescribed medication.
Question 2: What Is Your Generic Fill Rate?
Generic utilization can reveal opportunities to manage drug costs without changing the entire formulary. At the plan level, Cloud Advisors’ benchmarking of 14,000 Canadian employers found that 96% of plans include a generic substitution provision, but only 60% make it mandatory (Source). However, this is a measure of how common these plan rules are, rather than how many prescriptions are actually filled as generics.
What to ask your insurer: What is your plan’s generic fill rate, and what percentage of claims go to multi-source brand-name drugs where a generic is available?
What the answer tells you: If your plan has voluntary rather than mandatory generic substitution, making it mandatory may deliver meaningful savings on its own, before a full formulary change is even on the table. If your generic rate is already high, this cost-management measure may already be working, and the case for a managed formulary may depend more on other factors.
Question 3: What Are Your Top 10 Drugs by Total Spend?
This question reveals the composition of your costs, not just the total.
What to ask your insurer: Provide the top 10 drugs by total spend on our plan, with year-over-year growth for each.
What the answer tells you:
- If your top 10 is dominated by GLP-1s, biologics, or other specialty drugs, tools such as prior authorization, step therapy, and indication-based criteria, whether built into a managed formulary or offered separately depending on the insurer, may help address those specific cost drivers.
- If your top 10 is mostly traditional chronic-condition medications (blood pressure, cholesterol, mental health), the immediate financial case for a managed formulary may be weaker. Other plan design changes, like mandatory generic substitution or dispensing fee caps, may be more proportionate.
Question 4: How Many of Your Current Claims Would Be Affected by a Formulary Switch?
This is the question that most directly addresses employee-experience concerns and helps employers understand the potential impact of a change before making a decision.
Plan sponsors may assume that a large proportion of prescriptions will be affected by a move to a managed formulary. However, the actual impact depends on the insurer’s formulary and the medications employees use.
Many routine prescriptions, such as antibiotics, blood pressure medications, antidepressants, and cholesterol-lowering drugs, may remain covered under both models without changes to the claims process.
What to ask your insurer: Run a formulary impact analysis on our most recent plan year. Show how many claims would have been affected, which drug categories those claims fall into, and what the estimated cost differential would have been.
What the answer tells you: This converts the formulary conversation from an abstract concept into a specific, quantified assessment of your plan. It shows both the potential cost impact and how many claims or employees may be affected. You need to pay particular attention to ongoing prescriptions that may require an alternative medication, prior authorization, or a clinical exception.
Question 5: What Is Your Year-over-Year Drug Cost Trend?
Reviewing drug spending over multiple plan years can help identify whether costs are increasing and what may be driving that growth.
What to ask your insurer: What is our plan’s year-over-year drug cost growth rate, and what is driving it: more claimants, a shift in drug mix, or both?
What the answer tells you: If growth is primarily driven by more plan members making claims, that reflects broader utilization and may not be directly addressable through formulary design alone. Suppose growth is driven by a shift in the mix, such as more GLP-1s, specialty drugs, or brand-name claims where generics exist. Those are the cost drivers a managed formulary may be better positioned to address.
Putting the Five Questions Together
No single measure determines the best formulary, but you can review the five findings together to identify which options deserve further analysis:
| Your Situation | Likely Direction |
|---|---|
| Specialty drug concentration is high, generic fill rate is low, top-spend drugs include GLP-1s or biologics, and drug costs are increasing | Stronger case for evaluating a managed formulary |
| Costs are stable or growing at a manageable rate, generic substitution is high, and claims are concentrated in traditional categories | Other plan design tools, such as annual maximums, mandatory generic substitution, or dispensing fee caps, may deliver sufficient cost control without a formulary change |
| Mixed results across the five questions | A more targeted approach may be worth exploring, such as adding PA for specialty drugs or step therapy for selected drug categories, if the insurer offers these options alongside broader formulary coverage |
It’s also worth remembering that a reduction in eligible drug claims doesn’t automatically show up as an equal drop in your premium at renewal. How much of that savings actually reaches your premium depends on your funding arrangement, how the insurer prices risk, and other contract terms. Before treating any projected savings as a given, ask your insurer how those claims savings would actually flow through to your renewal. This is also an important consideration when looking at ways to reduce an employee benefits renewal increase.
The goal of this audit is not to make the decision alone. It is to walk into the conversation with your insurer or advisor already knowing the shape of your claims, the main cost drivers, and the specific questions your situation raises. That changes the conversation from “what should we do?” to “given what we see in our data, here are the options we need to evaluate.”
Important Reminder: Ask your insurer for aggregated, de-identified utilization numbers rather than individual prescription or diagnosis details. The point of this audit is to spot plan-level patterns, not to look into anyone’s personal health information.
