A formulary is a list of approved drugs in a health plan or delivery institution. The second best solution is to recognize that drugs will be deployed in low value uses and therefore to put only some drugs on the menu. Dr. Zeckhauser described the health plan menu setting problem. In this situation employers and plans negotiate prices. Plans set services, with some constraints by employer.
Employees then choose plans and there are heavy subsidies for each plan.
One might ask why not get rid of the indemnity plan. First, there are laws that say you can't. Second the state legislators are in the indemnity plan. The solution has been to risk adjust the premium and to offer a fixed dollar subsidy for whichever plan is chosen. In this situation employees will face correct prices and the plans will have no incentive to distort offerings since they get paid for taking on greater risks and employees pay full costs at the margin.