An Overview of Prescription Drug Insurance

Prescription drugs are a significant part of our healthcare system. The Journal of the American Medical Association (JAMA) reported that 59 percent of Americans used at least one prescription drug in 2011-2012. So even if you're not using a long-term medication to treat a chronic condition, chances are very good that you'll need a prescription every once in a while.


And the prescriptions that people take are becoming increasingly expensive, at a rate that is far outpacing overall inflation (this is not a new phenomenon; a Health Affairs article from 1990 notes that prescription costs were among the fastest-growing health care expenditures for elderly households in the 70s and 80s).

JAMA reported that as of 2013, per-capita prescription drug spending in the United States was more than double that of other industrialized nations, and accounted for 17 percent of "overall personal health care services." According to the 2015 Milliman Medical Index, the cost of prescriptions increased by 13.6 percent from 2014 to 2015, which was the primary factor driving the overall increase in health care costs during that time. 

Clearly, paying for prescription drugs is a significant part of a comprehensive health insurance plan. But coverage for prescription drugs has evolved considerably over the past few decades.

Prescription coverage has long been the norm under most private health insurance policies, but in the individual market in the early 2000s, some carriers began shifting towards plans that either didn't cover prescriptions at all, or that only covered generic drugs. By early 2013, according to a HealthPocket analysis, only 82 percent of plans available in the individual market covered prescription drugs, and that included plans with "limited coverage."

Healthcare Reform & Prescription Drugs

When the Affordable Care Act was written, lawmakers knew that prescription drug coverage had to be included on all plans, as the financial and medical repercussions of not having prescription coverage could be overwhelming.

So prescription drugs are one of the ACA's essential health benefits, which means they've been covered on all new individual and small group health plans since 2014. Large group plans (in most states, that means at least 51 employees, although ​in a few states, it means at least 101 employees) are not required to cover the ACA's essential health benefits other than preventive care, but the vast majority of large group plans already covered prescription drugs before the ACA was implemented, and have continued to do so. 

How Do Health Insurance Plans Cover Prescriptions?

There's wide variation in terms of how health plans cover prescription drugs. There are essentially three general benefit designs that plans can use:

  • Copays for prescriptions that start right away. For example, a plan might charge $10/$25/$50/30% for Tier 1/Tier 2/Tier 3/Tier 4 drugs, with no deductible or other cost-sharing.
  • A prescription deductible that's separate from the medical deductible, after which copays apply depending on the drug tier. In the proposed Benefit and Payment Parameters for 2018, HHS noted that the standardized plans they're proposing for 2018 will include separate medical and prescription drug deductibles for silver plans, "reflecting the commonality of this cost-sharing structure in QHPs at these levels of coverage." In other words, this plan design is already quite common across plans sold in the individual market. For the standardized plans that HHS has proposed for 2018, silver plans would have a $500 prescription drug deductible, in addition to a $3,500 medical deductible.
  • An integrated medical/prescription deductible, with prescription copays or coinsurance that apply only after the full deductible is met. HSA-qualified plans cannot provide benefits other than preventive care before the deductible, so those plans will only cover prescriptions after you've paid your deductible for the year.

Some states have implemented restrictions on how much a health plan can require members to pay for specialty drugs, in an effort to keep medications affordable for people with conditions that can only be treated with very high-cost drugs.

But even if your state hasn't, and you're stuck paying a large percentage of the cost of a very expensive drug every month, know that your health insurance plan will pay 100 percent of your prescription costs once you've met your out-of-pocket maximum for the year.

From that point on, your drugs will be covered in full for the remainder of the year. 

All About Formularies

The formulary is the list of drugs that your health plan will cover. Within the formulary, health plans divide drugs into tiers, with the least-expensive drugs typically being in Tier 1 and the most expensive drugs being in Tier 4, 5, or 6, depending on how the plan is designed.

Top-tier drugs tend to be specialty drugs, including injectables and biologics. For these drugs, the consumer will usually have to pay a percentage of the cost (ie, coinsurance rather than a copay), unless state regulations have a cap on specialty drug costs.

Within the guidelines established by HHS and state regulators, health insurers are free to develop their own formularies and adjust them as needed over time. 

Under the ACA, a plan's formulary has to cover the greater of

So although every general category of medication is covered, that doesn't mean that a specific medication will be covered by every plan, or even by any plans in a given area. There's an appeals process available, however, if you and your doctor believe that it's essential for you to use a drug that's not on your health plan's formulary.

Medicare & Prescription Drugs

Unlike private health insurance plans, Original Medicare (Medicare Parts A and B) does not cover prescription drugs. In 2003, Congress passed H.R.1, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The law created a new program—Medicare Part D—to help cover the cost of prescription drugs for Medicare enrollees.

In order to have coverage for prescriptions, Medicare enrollees need to have private coverage. There are a few avenues for obtaining prescription coverage once you're eligible for Medicare:

  • a stand-alone Medicare Part D Prescription Drug Plan, which can be used in tandem with Original Medicare
  • Medicare Advantage plan that includes Part D prescription drug coverage (these Medicare Advantage plans are known as MAPD)
  • Supplemental coverage from an employer or a spouse's employer

Medicare Part D has a "donut hole" during which enrollees were initially responsible for 100 percent of their drug costs. The Affordable Care Act included a provision to close the donut hole; that process is gradually being implemented, and the donut hole will disappear by 2020.

Medicaid & Prescription Drugs

In every state, Medicaid covers prescription drugs. If you're enrolled in Medicaid (including people who became newly eligible as a result of the ACA's expansion of Medicaid), your prescriptions will be covered in full or with modest copays.

However, for people who are dual-eligible for Medicaid and Medicare, Medicaid stopped covering prescription drugs in 2006, when Medicare Part D was implemented. Dual-eligible beneficiaries receive their prescriptions through Medicare Part D (rather than Medicaid), but the Extra Help program pays the premiums and most of the cost-sharing for the prescription plan. 

Prescription Drug Discount Plans & Stand-Alone Plans

If you're on a grandmothered or grandfathered plan that doesn't cover prescription drugs, or if you're uninsured, there are a variety of stand-alone prescription drug insurance plans and discount plans on the market. They can be offered by insurance companies, pharmacies, drug manufacturers, or advocacy/membership organizations such as AARP.

If you're considering this sort of plan, read the fine print very carefully. Know that with a discount plan, you'll typically still pay a considerable amount for high-cost drugs, so keep in mind that if the marketing materials say "up to 60 percent off," that doesn't mean that you'll get 60 percent off the cost of any drug you might need.

Stand-alone drug plans do not count as minimum essential coverage under the ACA, so if you're uninsured and have a prescription insurance or discount plan, you'd still be on the hook for the ACA's individual mandate penalty, assuming you're not exempt.

A Note From Verywell

Prescriptions are expensive, and having adequate coverage can make the difference between being able to afford your medications versus having to do without.

If you're struggling to pay for your prescriptions, there are prescription assistance programs that can help. If you're confused about your benefits or the coverage options available to you, reach out to your employer's HR team, or to a broker or navigator who can help you compare the various plans. Please don't feel like you have to figure it all out on your own; assistance is available in your community.

Sources: Medicare Prescription Drug, Improvement, and Modernization Act of 2003. 108th Congress (2003-2004).

Department of Health and Human Services, Patient Protection and Affordable Care Act, HHS Notice of Benefit and Payment Parameters for 2018. 9/6/2016.

Girod, Christopher S., Weltz, Scott A., Hart, Susan K., 2015 Milliman Medical Index, May 19, 2015.

Kantor, Elizabeth D., MPH; Rhem, Colin D., PhD, MPH; Haas, Jennifer S., MD, MSc; Chan, Andrew T., MD, MPH; Giovannucci, Edward L., MD, ScD. Trends in Prescription Drug Use Among Adults in the United States From 1999-2012. The Journal of the American Medical Association, November 3, 2015, Vol 314, No. 17.

Kesselheim, Aaron S., MD, JD, MPH; Avorn, Jerry  MD; Sarpatwari, Ameet, JD, PhD. The High Cost of Prescription Drugs in the United States. The Journal of the American Medical Association, August 23/30, 2016, Vol 316, No. 8.

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