A hospice formulary is described in clinical terms: a list of covered medications, organized by therapeutic category, with tiers and authorization requirements. But for hospice financial and executive leadership, the formulary is something else. It is the primary structural control over one of your largest variable cost lines.
Under the Medicare Hospice Benefit, all medications related to a patient’s terminal diagnosis are the hospice’s financial responsibility. There is no pharmacy carve-out. Drug costs come directly out of the per diem rate. The formulary determines what gets covered, what requires prior authorization, and what clinical pathways govern prescribing decisions, and each of those choices has a direct line to your PPD.
Organizations that treat the formulary as purely a clinical document leave money on the table. Organizations that treat it as purely a cost control tool risk clinical outcomes and compliance exposure. The financial case for proper hospice formulary design is that it is both, and getting it right requires expertise in both dimensions simultaneously.
How Formulary Design Affects PPD
PPD (per-patient-per-day drug cost) is the financial output of your formulary. Every prescribing decision that your formulary allows or encourages contributes to that number. The levers are specific:
Therapeutic substitution. Within many drug classes used in hospice care, multiple agents produce equivalent clinical outcomes at materially different costs. Morphine and hydromorphone are both effective opioid analgesics for pain management; their acquisition costs differ. Generic formulations of symptom management drugs are clinically equivalent to brand-name agents in most hospice applications. A formulary that defaults to preferred generic and therapeutically equivalent agents, without compromising clinical outcomes, is a formulary that runs at a lower PPD.
Prior authorization for high-cost agents. Certain drug categories carry disproportionate cost relative to their frequency of use: high-cost pain management agents, specialty antiemetics, some respiratory medications. A formulary that requires clinical documentation, such as diagnosis, prior treatment, and clinical rationale, before approving these agents catches inappropriate utilization before it becomes a budget problem. This is not about restricting access; it is about ensuring that high-cost agents are deployed for the patients who actually need them.
Outlier identification and exception management. Every hospice formulary will have claims that fall outside the standard cost range: unusually complex patients, unusual diagnoses, atypical drug requirements. A well-designed formulary has a defined exception pathway of clinical review, cost authorization, and documentation. Without that pathway, outlier claims simply process and PPD spikes without a clear cause or remediation plan.
Off-formulary prescribing management. Physicians prescribe. Without a formulary structure and clinical staff guidance, prescribing patterns drift toward familiarity and convenience rather than cost efficiency. A formulary that actively communicates preferred agents to prescribers, and has a clinical team that can respond to off-formulary requests with a preferred alternative, reduces the cost of unmanaged prescribing variation.
The Compliance Dimension
For hospice financial leaders, formulary design is also a compliance issue. The Medicare Hospice Benefit requires that hospice organizations cover all medications related to the terminal diagnosis. An overly restrictive formulary, one that denies coverage for clinically appropriate medications to manage cost, creates audit exposure and potential survey findings.
The compliance case for proper formulary design runs in both directions: an adequately designed formulary covers what needs to be covered, while a well-designed formulary has the structure to manage cost within that coverage requirement.
Organizations that try to manage PPD through informal ad hoc restrictions, rather than a documented formulary structure, create compliance risk that can cost more in survey exposure than the pharmacy savings ever delivered.
MaxHaven’s formulary was developed by palliative care pharmacists with specific expertise in MHB compliance. It is designed to pass scrutiny from payers, surveyors, and the organization’s own clinical governance, while maintaining the cost controls that keep PPD in range.
What Formulary Governance Looks Like in Practice
For hospice executives and boards that want to understand how formulary governance actually functions, the practical structure looks like this:
Formulary review cycle. A properly managed hospice formulary is reviewed at defined intervals, typically annually, with mid-cycle updates for significant drug class changes or new clinical evidence. Each review evaluates PPD trend data, high-cost claim patterns, therapeutic substitution opportunities, and compliance with MHB requirements. The output is a documented formulary update with clinical rationale.
Prescriber communication. When formulary changes are made, whether new preferred agents, new prior authorization requirements, or new tier assignments, prescribers need to be notified with clear clinical rationale. A formulary change that prescribers don’t know about doesn’t change prescribing behavior; it just generates prior authorization friction.
Exception reporting. Finance and clinical leadership should receive regular reporting on off-formulary claims, prior authorization approvals and denials, and high-cost outliers. This reporting is both a financial management tool and a clinical quality indicator. Patterns in exception data often surface prescribing habits or patient population shifts worth addressing.
Audit trail. Every formulary decision, including coverage, tier assignment, prior authorization criteria, and exception approval, should be documented. In an MHB audit, the formulary document and its governance history are reviewable records.
Evaluating Your Current Formulary’s Financial Performance
If your organization has a formulary but does not have clear data on how it is performing financially, these are the right questions to bring to your PBM:
- What is our current PPD, and what is the primary driver of that number?
- What percentage of our claims are processed at formulary versus off-formulary pricing?
- What are our top 10 drugs by spend, and what is the formulary status of each?
- How many prior authorization requests did we process last quarter, and what was the approval rate?
- What would our PPD look like if we shifted our top three high-cost agents to preferred formulary alternatives?
If your current PBM cannot produce these figures from standard reporting, the formulary is being managed reactively, and the financial opportunity it represents is not being captured.
MaxHaven’s Formulary Design Approach
MaxHaven includes formulary design and management as part of our core PBM service. We do not offer a generic formulary that hospice organizations adapt to their patient population. We build a hospice-specific formulary around your patient mix, your clinical team’s prescribing patterns, and your PPD targets.
The process starts before the first patient is enrolled. MaxHaven’s palliative care pharmacists review your anticipated patient population, identify the drug categories that will drive the highest spend, and design a formulary structure that covers clinical needs while keeping PPD in the optimized range.
Once live, formulary performance is tracked monthly. PPD trend data, outlier claims, and off-formulary utilization are reported in plain numbers, not buried in a claims file that requires a data analyst to interpret.
The financial case for doing this work is not complex. A formulary that is designed to manage PPD, rather than inherited from a retail pharmacy relationship, produces materially lower pharmacy costs over time. The gap between the two is measurable and, for most organizations, significant. (For the CFO-level view of pharmacy spend overall, see What Every Hospice CFO Should Know About Pharmacy Spend.)
Your formulary is either working for your budget or against it. Let’s find out which.
Request a Formulary Performance Analysis | Talk to a MaxHaven Specialist
Frequently Asked Questions
How does a hospice formulary affect PPD? The formulary determines what is covered, what requires prior authorization, and which clinical pathways guide prescribing, and each of those choices drives PPD. The main levers are therapeutic substitution to equivalent lower-cost agents, prior authorization for high-cost drugs, outlier exception management, and off-formulary prescribing controls.
What does the Medicare Hospice Benefit require a hospice to cover? Under the Medicare Hospice Benefit, all medications related to the patient’s terminal diagnosis are the hospice’s financial responsibility and are paid out of the per diem rate. There is no pharmacy carve-out, which is why the formulary functions as a direct financial control.
Can a hospice restrict its formulary to control drug costs? A formulary that denies clinically appropriate medications to save money creates audit and survey exposure under the Medicare Hospice Benefit. The goal is not restriction but cost control within full coverage, using documented prior authorization and exception pathways rather than informal ad hoc denials.
How often should a hospice formulary be reviewed? A properly managed formulary is reviewed at defined intervals, typically annually, with mid-cycle updates when there are significant drug-class changes or new clinical evidence. Each review looks at PPD trend data, high-cost claim patterns, substitution opportunities, and compliance.
What formulary questions should a hospice ask its PBM? Ask for your current PPD and its primary driver, the share of claims processed at formulary versus off-formulary, your top drugs by spend and their formulary status, prior authorization volume and approval rate, and what your PPD would look like if top high-cost agents shifted to preferred alternatives.
MaxHaven RX is a hospice-specialized pharmacy benefit manager and part of the PPOK family of pharmacy brands. We serve hospice CFOs, administrators, executive leaders, non-profit programs, hospital-based programs, consortia, and new hospice organizations. Our average PPD: $5.44.
