In an effort to control health costs, payers are increasingly turning to step therapy (or “fail first”) policies in pharmacy benefit design. These policies restrict coverage of expensive therapies unless patients have already failed treatment with a lower-cost alternative. More than other utilization management tools such as formulary tiering, step therapy raises important ethical concerns regarding the proper balance between cost control and the ability of patients and clinicians to tailor care to the needs of the individual patient. This article provides eight design criteria to guide the ethical development and evaluation of step therapy policies and describes six clinical scenarios in which step therapy may be appropriate. The ethical criteria and scenarios are intended to provide guidance and transparency for insurers, patients, clinicians, and policy makers in choosing and paying for the appropriate therapies.