We investigate how formularies used by pharmacy benefit managers (PBMs) to steer consumer demand can constrain spending by affecting manufacturer rebates for branded drugs. We present a theoretical model of multidimensional contracting in which a PBM offers multiple drug manufacturers a menu of formulary-contingent rebate payments and then selects a formulary. We estimate how formulary placement affects drug demand for statins using data from Princeton University, a large employer that contracts with a single PBM to offer prescription drug coverage to its employees. Using our model and demand estimates, we predict the magnitude of rebates with one preferred and one non-preferred tier; we also examine the impact of changing the number of drug tiers or allowing for complete exclusion. Our predicted magnitudes align with aggregate rebate data, and we predict that allowing a PBM to flexibly place branded drugs on preferred- and non-preferred tiers can substantially increase rebate payments.