A drug formulary is a list of prescription drugs a health insurance plan or standalone drug plan covers. Each plan has its own formulary, so coverage for prescription drugs varies from plan to plan. These formulary drugs may include both name brands and generics.
Formularies are designed to cover a range of different categories and classes of drugs to help plan members access the prescription medications they need to get or stay healthy. Pharmacy Benefit Managers are responsible for creating formularies, pharmacy networks, and other aspects of drug plans. They’re third-party companies that work with both drug manufacturers and insurance providers.
Formularies are typically divided into tiers based on plan members’ cost-sharing requirements. Drugs in lower tiers tend to have lower copayments — the flat dollar amount plan members pay when they fill a prescription — than those in higher tiers. However, while many formularies function similarly, the specifics of which drugs are covered and how much varies significantly by plan and insurer. Read on to learn more about how formularies affect the cost of drugs and how they may affect your healthcare plan.
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Americans and Prescription Drugs
In 2023, 61% of American adults reported taking one or more prescription medications, with 25% using four or more drugs. Coverage for these prescription drugs is widely available through both public and private health insurance plans.
However, although prescription drug coverage helps Americans pay for their necessary medications, these plans don’t cover every drug on the market. Instead, they cover a specific list of drugs, known as a medication formulary or drug formulary.
How Do Drug Formularies Work?
While drug formularies are commonly used to determine which drugs are covered and how much, those guidelines are unique to the insurer and often the individual plan. Here’s a little more information on the basics of drug formularies.
Criteria for Formulary Inclusion
Pharmacy benefit managers decide what drugs to include in a prescription formulary based on many factors, including:
- Effectiveness of drug
- Relative cost
- Availability of generic alternatives
- Laws and regulations
Formularies are designed to limit coverage for drugs assessed as not worth the cost, either because they’re less effective than other options or because they’re too similar to other drugs on the formulary. Health plans may exclude coverage for a brand-name drug if a generic alternative is available.
Various laws govern drug formularies. For example, under the Affordable Care Act (ACA), qualified health plans like those sold in the Marketplace are required to cover at least one drug in each category and class. Some states mandate additional coverage.
How Do Insurers Use Formularies And How Does That Affect You?
Formularies are created by Pharmacy Benefit Managers and regularly reviewed by the insurer’s Pharmacy and Therapeutics Committee. Formularies are designed to encourage the use of lower-cost medications with proven effectiveness and, in doing so, help both the plan and its members reduce drug costs.
A health plan’s drug formulary affects which drugs members take and how much they pay. Members tend to pay lower prices for drugs in lower coverage tiers, and when a drug isn’t on the formulary, they may need to pay out of pocket or switch to a different drug.
Since formularies affect consumers’ prescriptions, it’s important to review the drug list before enrolling in a plan. Insurance companies post their plan formularies on their websites. Consumers also have the option to call the insurer and ask for details about covered drugs.
Formulary Changes Can Affect Coverage
Insurance companies regularly review their plan’s formularies and make changes, such as adding or removing drugs or moving covered drugs to different tiers. These changes can affect which drugs are available to plan members and how much they pay for them.
Insurance companies stop covering drugs if the FDA deems the medication unsafe or the manufacturer stops selling the drug. Drugs are moved to higher or lower tiers in the prescription formulary based on their costs and clinical effectiveness.
These changes impact plan members’ coverage. When a drug moves to a higher tier, members who take it pay higher copayments or coinsurance. When a drug is no longer covered, members have a few options: Pay out of pocket, switch drugs, or ask for an exception.
How Formulary Tiers Affect Pricing
Health insurance plans typically sort drugs into coverage tiers based on members’ cost-sharing requirements. The number of tiers and which drugs are in each tier varies between health plans. Here’s an example of what a health plan’s tiers might look like:
- Tier 1: Generic drugs
- Tier 2: Preferred name-brand drugs
- Tier 3: Non-preferred name-brand drugs
- Tier 4: Preferred specialty drugs
- Tier 5: Non-preferred specialty drugs
Drugs in lower tiers tend to cost plan members less than drugs in higher tiers. Specific costs vary from plan to plan, but as an example, a plan might charge a $15 copay for a month’s supply of a Tier 1 drug and a $1000 copay for a month’s supply of a Tier 5 drug. These costs apply after the plan member meets any applicable deductible, too.
Under the ACA, certain preventive medications are covered with a $0 copay, regardless of their tier, even if a plan member hasn’t met their deductible. These drugs may include statins, birth control, and pre-exposure prophylaxis.
Can You Get Coverage for Drugs Not on Your Plan’s Formulary?
It’s possible to get coverage for non-formulary drugs if they’re medically necessary. Insurance companies offer formulary exceptions on a case-by-case basis. The process for requesting an exception varies from insurer to insurer.
Formulary exceptions are made when insurers determine no drug on the medication formulary is suitable for you, either because they could have negative health effects or not work as well. Insurers make these decisions after reviewing documentation submitted by your prescribing physician.
Sometimes, it’s not necessary to go through the exceptions process. When a doctor prescribes a drug that’s not covered by insurance, your pharmacist may be able to switch the non-formulary drug for a comparable formulary medication. You may or may not need approval from the prescribing doctor, depending on state laws.
Putting It All Together
Drug formularies play a pivotal role in shaping the landscape of prescription drug coverage within health insurance plans. These carefully curated lists, influenced by Pharmacy Benefit Managers and regulatory guidelines, determine the cost-sharing tiers for plan members and impact individuals’ choices regarding their medications. Understanding the intricacies of a formulary is essential for consumers, as it directly affects the drugs available to them and the associated costs.
Regular reviews and adjustments to formularies by insurance companies underscore the dynamic nature of prescription drug coverage, necessitating informed decision-making by plan members. As the healthcare landscape evolves, staying informed about formulary changes, tier structures, and coverage options becomes crucial for individuals seeking affordable and effective healthcare solutions.
If coverage for a specific drug is an important factor in selecting a healthcare plan for you or your family, make sure to speak with a trusted healthcare agent.