Dramatically rising costs for new drugs are posing major challenges for hospital budgets. In response to these pressures, hospitals must set priorities for which drugs they will list on their formularies. While there have been studies relevant to decision making in hospitals regarding drugs, none have described how priority setting for drugs in hospitals is done and evaluated it against a framework of how it should be done. In this paper we describe the process of priority setting for new drugs in a hospital formulary and evaluate it using a leading conceptual framework for healthcare priority setting--Daniels and Sabin's 'accountability for reasonableness'. The findings from this study provide an evidence base for developing strategies to improve this hospital's priority setting regarding its drug formulary. The process we utilized here, describing using case study methods and evaluating using 'accountability for reasonableness', is a generalizable process for improving the fairness of priority setting in hospital drug formularies.