Formularies, in one form or another, have been in existence for nearly 100 years. Beginning simply as a list of available agents, the formulary has evolved into a complex system which acts as a guide to prescribing practices. As the importance of the formulary has increased, so has the need for formulary managers to make an appropriate decision about each drug's formulary status. Several systematic approaches to drug evaluations have been developed to aid in the decision process. However, while some reviews of drug utilisation contain fairly rigorous analyses of their clinical efficacy, very few include an economic evaluation that goes beyond the cost of drug acquisition, preparation, distribution and administration. This is surprising, since formulary managers rank economic data second only to clinical data when making formulary decisions. In the past this apparent oversight has been due, in part, to the absence of a sophisticated model which can both approximate a drug's true economic impact and express cost and quality in similar terms. The explosion of new and very expensive biotechnology drugs into the market has the potential to improve patient care significantly. Such drugs also have the potential to increase institutional pharmacy budgets significantly; with some analysts predicting a spending of $US60 million yearly for these drugs by the year 2000, critical evaluation will be mandatory. Fortunately, advances in the relatively new science of pharmacoeconomics have made it possible to conduct appropriate estimates of the true economic impact of new drug therapies. Pharmacoeconomic studies can be very useful in evaluating drugs for formulary inclusion and in assessing the effects of formulary changes on institutional budgets. Cost-effectiveness and cost-benefit analyses, utilising decision analysis models and/or data gathered from clinical studies, are used most frequently. Relatively simple models can be used to evaluate drugs within the same class if sufficient published data on their clinical efficacy and safety are available. More complex analyses are necessary when comparing dissimilar agents or when comparing agents with non-drug therapy. Pharmacoeconomic studies have frequently been used to demonstrate that very substantial direct costs of drug therapy are often offset by equal or greater reductions in other institutional direct and indirect patient care costs. Pharmacoeconomic studies have also been used to calculate the relative cost-effectiveness of drug therapies for different disease states, although such evaluations are more useful to governmental and regulatory agencies than to individual institutions.(ABSTRACT TRUNCATED AT 400 WORDS)