Indication-Based Formularies: A New Tool in Drug Cost Management

A recent announcement from the Centers for Medicare & Medicaid (CMS) has opened the door for Medicare Part D plans to use indication-based formularies beginning in 2020. This policy expansion provides a new tool for Part D plans to leverage costs and communicate formulary status to better inform prescribers and patients while solidifying what commercial payers may have been doing all along by using Prior Authorization (PA).

Today’s formularies only allow a drug to have a single formulary status indicating whether the drug is covered and, if it is covered, how preferred the drug is on the formulary. A drug covered for one indication must also be covered for all indications approved by the Food & Drug Administration (FDA). This forced payers to either require a prior authorization for a drug (and approve selected uses) or cover a drug across all uses.

Indication-based formularies allow payers to communicate drug coverage based on the condition for which it is being prescribed. Instead of approving or denying coverage by the drug, payers can design their formularies to include drugs for certain indications and not for others. Any indication not approved would require the prescriber or patient to follow the same process as they would for other off-formulary drugs.

While designing formularies with specific indications in mind is not a new strategy in formulary management, the CMS policy expansion provides payers with an opportunity to bring their indication coverage data into the forefront and make it more readily available to prescribers. As Part D indication-based formularies gain momentum and become more routine, payers will need to communicate indication specifications to prescribers and patients through Formulary and Benefit (F&B) data. These new policies in Medicare Part D will likely expand into other payers’ lines of business as well.


The Benefits of Indication-Based Formulary Statuses and Restrictions

The main benefit of opening Part D up to indication-based formularies is the negotiating power it gives to plans to control drug costs. “[Providing] Part D plans with the flexibility to employ the latest formulary tools would enable them to better negotiate for prescription drugs, especially high-cost drugs. The ability to exclude drugs from their formulary for specific indications will provide additional negotiating leverage with manufacturers, which can ultimately reduce beneficiary and program costs,” notes the CMS memo.

When payers communicate their indication restrictions to prescribers through F&B data in the Electronic Healthcare Record (EHR), prescribers can initially select better prescription medications in their preferred workflow. Choosing the best alternative in the initial prescription avoids callbacks and changes due to uncovered drugs. Under this policy update, Part D enrollees are expected to have better access to medicines and enjoy lower costs.

There may be benefits to prescribers and patients within the commercial sphere as well. Medications that would require prior authorization to identify the indication may appear in formularies as approved for one indication and restricted for another use. Eliminating unnecessary prior authorizations may make medications more likely to be prescribed and therefore more accessible to patients.


Preparing the Market for Indication-Based Formulary Data

  • Part D plans must ensure that a therapeutically similar drug is on formulary for any non-formulary indication
  • Communicating indication restrictions to prescribers through EHRs requires coding indications in ways that can be interpreted in EHR systems
  • Providing indication data to prescribers within EHRs will require changes to current EHR workflows and displays to make it effective
  • Prescribers must understand and trust the indication data and it needs to reflect what will happen at the pharmacy when the claim is transmitted
  • Challenges may arise in situations where a patient has an unconfirmed or recent diagnosis 
  • Cases where a drug is used to assist with diagnosing a condition may cause difficulties for prescribers and patients
  • Where today a drug is approved but in the future it is approved only for certain indications there may be an increase in pharmacy calls to prescribers and additional steps to navigate for restricted drugs


Addressing Indication-Based Formulary Communication Challenges

There are three initial hurdles to successfully communicating formulary indication restrictions through EHRs: 1) adding indications to formulary statuses, 2) displaying alternatives by indication, and 3) communicating indications.

Adding the Mechanism for Communicating Indication Restrictions

As the governing body of electronic prescribing standards, the National Council for Prescription Drug Programs (NCPDP) has proposed adding three indication fields to Formulary and Benefit (F&B) data as part of the general information section. These fields would include (1) an Indication Code used by the payer to represent the indication, (2) an Indication Code Qualifier to determine code type, and (3) an Indication Code Description that enables clarifying information to be added in the form of free text descriptions.

This flexibility allows payers to modify all F&B elements based on the indication and provides support until the industry can rely on a common indication code vocabulary. If there is no indication, the fields can be left empty.

Displaying Alternatives by Indication

Another challenge to communicating indication-based formulary restrictions through EHRs is implementing a way for prescribers to find covered alternatives. With a major formulary overhaul such as this, there is increased importance on having alternatives available within formulary data to provide guidance on more appropriate treatments. Actionable alternatives information minimizes prescriber and patient frustration and decreases the occurrence of therapy abandonment. 

Payers can curtail these difficulties by expanding alternatives information within their formularies and enabling this data to be displayed through EHRs. If a diagnosis code is known, an EHR would be able to display the clinically appropriate alternatives list.

Communicating Indications

Nomenclature using ICD-10 and SNOMED CT provides the ability to link a drug to its indication using recognized clinical terminology. However, drug use might not relate to the primary diagnosis of a patient. For example, an oncology patient undergoing chemotherapy might receive an anti-emetic to prevent chemotherapy-induced nausea but not be given a corresponding diagnosis.

ICD-10 codes are primarily used to indicate a diagnosis for reimbursement purposes. Not every diagnosis is documented for a patient, especially when it doesn’t impact reimbursement or treatment. Requiring a diagnosis to meet indication formulary specifications places an additional burden on prescribers to determine and record the patient’s condition.

SNOMED-CT codes can be associated with the prescription and sent to the pharmacy as part of prescriptions. Inclusion of indication information can be used to remind the patient why they should take a particular medication. Every prescription typically has a reason for its use even if the diagnosis isn’t yet documented

Benmedica: Supporting Indication-Based Formularies and Alternatives

Benmedica has begun work to upgrade its systems to add the capabilities for indication-based formularies. Included in this work is the ability to read and send F&B data, develop therapy areas where indication-based formularies may offer opportunities for savings, and supplement existing formularies with relevant alternatives using Benmedica SmartAlts™ technologies.

The NCPDP Formulary & Benefit Task Group, led by Benmedica founder Bruce Wilkinson, has initiated the process of including indications as part of statuses, tiers, copay, prior authorization, step therapy, and medication alternatives. NCPDP members and non-members can participate in Task Group calls (

More information on how Benmedica can help payers prepare for and address indication-based formularies is available at or by contacting Bruce

Liz Shea, Chief Clinical Officer of Benmedica, holds a BS degree in Pharmacy. Her experience includes retail pharmacy and working as a senior advisor in Product Development for CVS Caremark's physician connectivity area. She has been involved in all aspects of e-prescribing, including formulary & benefit, for over 15 years and continues to work towards improving technology within healthcare.