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48 Journal of Managed Care Pharmacy JMCP January/February 2004 Vol. 10, No. 1 www.amcp.org ormularies have existed in various forms for nearly 100 years. Beginning as a simple list of available drugs, they have evolved into a dynamic guide for the selection and application of preferred drug therapies by pharmacists and physicians in clinical applications. Formularies have been utilized widely at the hospital, community, and national levels with distinct functions in cost containment as well as quality assurance. Traditionally, formularies have been used to promote the rational use of drugs and to set drug use standards. Pharmacy and therapeutics (P&T) committees make formulary decisions and evaluate whether the benefits of therapies outweigh the risks primarily based on the documented safety and efficacy of new drug formulations. However, with drug expenditures increasing at the rate of 14% to 18% a year in ambulatory care and a national drug bill for 2001 that reached between $160 billion and $170 billion, cost considerations have become paramount. The underlying factors for higher drug expenditures, in addition to price increases, are an aging population, longer life spans, improvements in the diagnosis and treatment of diseases, rising prevalence of chronic diseases, the advent of “lifestyle medications,” increases in the number of new drugs into the market, and increases in spending on drug promotion, including direct-toconsumer (DTC) advertising. The May 2002 report from the National Institute for Health Care Management, “Prescription Drug Expenditures in 2001: Another Year of Escalating Costs,” attributed 39% of the increase in prescription drug expenditures from 2000 to 2001 to the increase in the number of prescriptions, 37% to “price increases,” and 24% to a “shift to higher-cost drugs,” also known as drug mix. The increase in expenditures and related financial pressures has led to a reassessment of the role of drug formularies. Contemporary formulary selection processes now place greater emphasis on the containment of drug costs and assessment of the economic efficiency of drug treatments. Ideally, according to the Academy of Managed Care Pharmacy (AMCP), “every drug would be selected for value, properly prescribed, competently dispensed, diligently monitored, and continually assessed for effectiveness.” In this regard, government, third-party payers, and health care providers are paying more attention to cost-effectiveness analysis (CEA) because it is the most common economic evaluation method for health care. Cost-effectiveness identifies, measures, and compares the net costs and net benefits of alternative interventions. Comparisons are usually expressed as quality-adjusted life-years (QALYs) gained, life-years saved, or disability days avoided. However, little is known about the real ABSTRACT