Final answer:
A formulary is a list of prescription drugs covered by a third-party payer, such as an insurance company or government program like Medicare. It is impacted by the health financing system in place, whether it's fee-for-service or an HMO, and is designed with cost-effectiveness in consideration.
Step-by-step explanation:
A formulary is a list of medicines reimbursed or covered by a third-party payer, such as an insurance company or government program. In healthcare systems, medications on the formulary are typically selected based on efficacy, safety, and cost-effectiveness. Part B of Medicare is an example of such a third-party payer that covers health-care costs outside of hospital stays, like physician services and outpatient visits. It operates on a system where participants pay monthly fees, deductibles, and copayments, while the government funds about 75% of the overall costs. Prescription drugs often fall under such coverage, and programs like the Medicare Prescription Drug and Modernization Act of 2003 offer assistance through discounts and benefits to make prescription drugs more affordable to certain populations, particularly the elderly and disabled.
Health financing can come in different forms, such as the fee-for-service model, where medical care providers are reimbursed based on the services they provide, and health maintenance organizations (HMOs), where providers are paid according to the patient load and are responsible for resource allocation. Consequently, this affects the medicines included in the formulary, as health plans might negotiate different terms with pharmaceutical companies. As with any insurance system, there is an inherent challenge of adverse selection, where there is a potential discrepancy in the risk knowledge between the insurance buyers and the company, influencing who avails of the insurance and the resulting cost implications.