Hospitals don’t just stock any drug that’s available. They pick generic drugs through a strict, evidence-based system designed to balance safety, effectiveness, and cost. This system is called a hospital formulary is a continuously updated list of approved medications used within a healthcare system, managed by a Pharmacy and Therapeutics (P&T) committee to ensure the safest and most cost-effective drugs are available. It’s not a static list - it’s reviewed quarterly at major hospitals and every six months at smaller ones. The goal? To give patients the right medicine at the right price - without compromising care.
How Generic Drugs Get on the Formulary
It starts with a request. A pharmacist, doctor, or even a nurse can submit a drug for review. But they don’t just say, "Let’s add this." They submit a full dossier: clinical studies, pharmacology data, dosing info, and evidence of therapeutic equivalence. The FDA’s Orange Book is a public database that lists approved drug products with therapeutic equivalence evaluations, used as the baseline for generic drug approval in U.S. hospitals. If a generic drug is rated "AB" in the Orange Book, it means it’s bioequivalent to the brand-name version - its absorption in the body falls within 80% to 125% of the original. That’s the minimum.
But hospitals go further. A Pharmacy and Therapeutics (P&T) committee is a multidisciplinary group of pharmacists, physicians, and healthcare economists responsible for evaluating and approving medications for inclusion in a hospital’s formulary. typically has 12 to 15 members. They look at at least 15 to 20 clinical studies per drug class. They check adverse event reports from the FDA’s database. They ask: Does this generic reduce hospital stays? Does it lower readmission rates? Does it improve patient adherence? One study from Johns Hopkins found switching to formulary-preferred generic anticoagulants saved $1.2 million a year - with no rise in complications.
Tiers and Cost Control
Hospital formularies are divided into tiers. Most have three to five levels. Generic drugs are medications with the same active ingredient, strength, dosage form, and route of administration as a brand-name drug, approved by the FDA after demonstrating bioequivalence. almost always land in Tier 1 - the lowest cost tier for patients. That means little to no out-of-pocket expense. This isn’t just about saving money for the patient. It’s about reducing system-wide spending. In 2023, generic drugs made up 90% of prescriptions in U.S. hospitals but only 26% of total drug costs, according to IQVIA.
But here’s the catch: not all generics are equal. Two drugs might be bioequivalent, but one has a tablet that’s harder to swallow. Another might come in a capsule that patients forget to take. The P&T committee weighs these factors. A 2022 study in Health Affairs found that formulary committees specifically assess how a drug’s formulation affects patient compliance - especially for chronic conditions like high blood pressure or diabetes.
Therapeutic Interchange and Substitution
Unlike Medicare Part D, where patients pay more for non-formulary drugs, hospitals use therapeutic interchange is a process where pharmacists substitute one drug for another within the same therapeutic class based on clinical equivalence and cost, without requiring a new prescription.. This means a pharmacist can swap a non-formulary generic for a preferred one at the pharmacy counter - as long as it’s clinically equivalent. This isn’t done lightly. It’s guided by protocols and often requires documentation.
But this system isn’t perfect. A 2022 survey by the American Pharmacists Association found 57% of pharmacists had conflicts with doctors over substitutions. Physicians worry about switching patients who are stable. Pharmacists argue that if two drugs are bioequivalent, why not use the cheaper one? The tension comes down to trust - and sometimes, habit.
Real-World Challenges
Supply shortages hit hard. In 2022, the FDA tracked 268 generic drugs in short supply. When one generic runs out, hospitals can’t just wait. They need a backup. That’s why top hospitals like Mayo Clinic have formed "therapeutic alternatives committees" - small teams that pre-identify equivalent drugs before a shortage happens. They’ve achieved a 98% success rate in keeping patients on treatment.
Another issue? Formulary changes cause errors. Nurses on AllNurses.com reported that 73% saw medication mistakes during transitions - like confusing one generic tablet for another that looks similar. Training becomes critical. Hospitals now require annual education for staff on new formulary additions.
And then there’s influence. A 2021 JAMA Internal Medicine study showed pharmaceutical reps still visit hospitals to promote their drugs - even generics. Some reps highlight minor differences in packaging or dosing, not clinical data. That’s why ASHP requires all P&T members to complete annual conflict-of-interest training. Transparency is built into the process.
The Bigger Picture
Hospital formularies aren’t just about saving money. They’re shifting toward "total cost of care." That means looking beyond the sticker price of a pill. Does this generic reduce emergency visits? Does it cut down on lab tests? Does it prevent hospital readmissions? A 2023 KLAS Research report found 61% of hospitals now use predictive analytics to model these downstream effects.
Some are even starting to use pharmacogenomics - testing a patient’s genes to determine which drug they’ll respond to best. Eighteen percent of academic medical centers are piloting this. Imagine a formulary that doesn’t just pick the cheapest drug, but the one most likely to work for a specific patient.
Regulation is pushing this forward. The Inflation Reduction Act of 2022 is changing Medicare Part D, and hospitals are aligning their formularies accordingly. The Centers for Medicare & Medicaid Services (CMS) is moving toward making formularies mandatory for all Medicare-certified facilities by 2028.
What’s Next
One big gap? Biosimilars. These are generic versions of complex biologic drugs - like those used for cancer or autoimmune diseases. Only 37% of hospitals have formal protocols for evaluating them, according to a 2023 FDA workshop. The science is evolving. The rules aren’t. That’s where the next wave of formulary work will happen.
For now, the system works - when it’s done right. Hospitals that follow ASHP’s 2023 guidelines see 18% to 22% lower drug costs without worse outcomes. The key is structure: evidence first, cost second. Patient safety always comes before savings. And every decision, from a tablet’s color to a drug’s source, is reviewed by a team that’s trained, independent, and accountable.
What is a hospital formulary?
A hospital formulary is a list of medications approved for use within a healthcare facility. It’s managed by a Pharmacy and Therapeutics (P&T) committee and includes drugs selected based on clinical evidence, safety, cost-effectiveness, and patient outcomes. Only medications on the formulary are routinely stocked and prescribed.
Why do hospitals use generic drugs?
Hospitals use generic drugs because they are clinically equivalent to brand-name drugs but cost significantly less. Generic drugs make up 90% of prescriptions in U.S. hospitals but only 26% of total drug spending. This allows hospitals to treat more patients without increasing costs.
Who decides which drugs go on the formulary?
A Pharmacy and Therapeutics (P&T) committee, made up of pharmacists, physicians, and healthcare economists, makes the decision. They review clinical studies, safety data, cost-effectiveness, and patient outcomes. Membership is typically 12-15 people, and all members must complete annual conflict-of-interest training.
How often is the formulary updated?
Academic medical centers review their formularies quarterly. Community hospitals usually do it twice a year. Urgent requests - like for a drug in short supply - can be reviewed in as little as 14 days.
Can a pharmacist substitute a non-formulary generic for a formulary one?
Yes, through a process called therapeutic interchange. Pharmacists can substitute one generic for another if they are bioequivalent and the change is allowed under hospital policy. This helps manage costs and supply shortages without requiring a new prescription.
Do formularies affect patient care?
When well-managed, formularies improve care by reducing costs and ensuring consistent, evidence-based prescribing. But poorly implemented changes - like sudden switches without staff training - can cause confusion and errors. A 2021 AMA survey found 32% of physicians felt formulary restrictions negatively affected patient care.
What’s the difference between a hospital formulary and Medicare Part D?
Hospital formularies focus on clinical effectiveness and total cost of care, using therapeutic interchange to manage drug use. Medicare Part D formularies focus more on patient cost-sharing tiers and often require prior authorization for non-formulary drugs. Hospitals have more control over substitutions at the point of care.
Are biosimilars included in hospital formularies?
Only 37% of hospitals have formal protocols for evaluating biosimilars, which are generic versions of complex biologic drugs. This is a growing area of change, as biosimilars become more common for conditions like rheumatoid arthritis and cancer.
