What Is a Health Insurer's Drug Formulary and Tier Pricing?

You can help yourself save money on the cost of prescription drugs

Health insurance helps patients get the medical care they require
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If you have prescription coverage for the drugs your doctor prescribes, you'll want to become familiar with your insurance company, Medicare or payer's drug pricing system called a formulary.

A drug's position in the formulary's tier pricing system will make a big difference in your overall drug expenses.

What Is a Formulary?

Your payer, whether it is a private insurance company, Medicare, Tricare, Medicaid or another program maintains a list of drugs it will pay for called its formulary.

Its formulary is comprised of generic drugs, prescription drugs and sometimes over-the-counter drugs (OTC) that were previously prescription-only drugs. For example, Prilosec and Naproxen used to be prescription only, but both are now OTC drugs. Some payer plans include Prilosec and Naproxen in their formularies.

What Are Formulary Tiers?

Tiers are groups of drugs that fall within description and pricing groups:

  • Tier 1 or Tier I: Tier 1 drugs are usually limited to generic drugs, the lowest cost drugs. Sometimes other, regularly lower price branded drugs will fall into this tier, too. Tier I drugs cost us the lowest co-pays, usually $10 to $25.
  • Tier 2 or Tier II: Tier II is usually comprised of brand-name drugs or more expensive generics. If you must take a brand name drug, your payer will have a list of branded drugs it prefers (because their cost is less, explained below.) These preferred brands are found in Tier 2. Tier II drugs cost us a middle-value co-pay, usually $15 to $50.
  • Tier 3: or Tier III: The more expensive brand-name drugs, and usually the ones your insurance company doesn't want you to get a prescription for (because their cost is higher, explained below) are also considered non-preferred. They are found in Tier 3. Tier III drugs will cost us even more than the lower tiers, usually $25 to $75 co-pay.
  • Tier 4 or Tier IV, also called specialty drugs: These are usually newly approved pharmaceutical drugs and are so expensive that your payer wants to discourage prescriptions for the drug. Tier IV is a newer designation, first used in 2009.A Tier IV designation seems to be a catch-all for expensive drugs. Rather than assign a specific dollar co-pay, payers will assign a percentage, like 60%. For example, a very expensive chemo drug, priced at $1,000 may cost the patient $600.

    Why Are Drugs Listed in Tiers?

    This is a one-word answer to that question: money.

    A drug's tier listing is a function of two things: its real cost and the payer's negotiated cost. The more the drug costs the payer, the higher the tier, and the more it will cost patients.

    Different drugs in each drug class are listed in different tiers. For example, the class of drugs that help people with GERD (gastroesophageal reflux disease) is called proton pump inhibitors, or PPIs. The least expensive PPI is the generic, called omeprazole, and it is always found listed in Tier I. Some of the mid-priced branded PPIs, like Prilosec or Prevacid, are usually listed in Tier II. The most expensive PPIs, like Aciphex or Nexium, are listed on Tier III.

    Using the PPI example above: A payer might negotiate its own price with the manufacturer or distributor of one of the more expensive drugs, like Aciphex or Nexium to a very low point. If they do that successfully, that drug became a "preferred brand," which usually means it becomes a Tier II drug. If they can't negotiate it low enough, it will be placed in Tier III and it will cost patients more, too.

    Do All Payers Use the Same Tiers?

    No, all payers don't list the same drugs on the same tiers. As just illustrated, the payer's tier assignment depends on its negotiated cost. If Payer A can negotiate a lower price for a specific branded drug than Payer B negotiates, then Payer A may list that brand on Tier II while Payer B may list it on Tier III.

    How Can I Find My Health Insurer's Formulary?

    Any healthcare payer will make its formulary available to you -- they want you to have it and use it. It will be readily available on its website, or you can call the customer service number and ask them to mail it to you.

    It's not unusual for a payer to make changes to its formulary or to move a drug from one tier to another. If you take a drug on a daily or regular basis, you may be notified when a shift takes place. Also, you'll want to double-check each year during open enrollment, when you have the opportunity to make changes to your coverage plan, to see if your drug has shifted its position in the payer's formulary.

    How Can You Save Money Using Your Payer's Formulary?

    If you have a basic understanding of drug classes and tier pricing, you can work with your doctor to choose the drug that will cost you the least. Review the prescription's class, and find its position in your payer's formulary to make sure you are getting the drug you need for the least amount of money.

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