An Overview of Prescription Drug Insurance

In This Article

Prescription drug coverage is a significant part of a comprehensive health insurance plan. But as drug prices rise, many insurance companies have put more restrictions on what they will and will not cover. That means that even Americans who are enrolled in a plan with prescription drug coverage may incur substantial out-of-pocket costs.

According to a report in JAMA, almost 60% of U.S. adults use at least one prescription drug and 15% take five or more different prescriptions.

Prescription medication costs have been outpacing the overall rate of inflation since the 1970s, increasing at a rate of more than 10% a year, according to the Milliman Medical Index. In addition, studies show per-capita prescription drug spending in the United States is more than double that of other industrialized nations.

Healthcare Reform

Prior to the Affordable Care Act (ACA), close to 20% of insurance plans did not cover prescription medications, according to a HealthPocket analysis. The ACA set a standard of essential health benefits, which includes prescription drug coverage on all new individual and small group health plans since 2014—the year the act took effect.

Large group plans—those including at least 51 (in most states) or 101 employees (in a few states)—are not required to cover the ACA's essential health benefits other than preventive care. However, the vast majority of these plans provide prescription drug coverage.

How Insurance Covers Prescriptions

There's wide variation in terms of how health plans cover prescription drugs and rules can vary from state to state. There are essentially three general benefit designs that plans can use.

  • Copays: Copays for prescriptions are a set amount that you pay for prescriptions right from the start. Copays are typically set in tiers according to the plan's formulary. For example, a plan might charge $10/$25/$50 for Tier 1/Tier 2/Tier 3 drugs, respectively, with no deductible or other cost-sharing.
  • Coinsurance: With coinsurance, you pay a percentage of the prescription cost and insurance covers the rest. This is typically an 80/20 or 70/30 split, meaning you pay 20% or 30% and your insurance covers the rest. Many plans with coinsurance require you to pay full price until you have met your deductible, then pay only a percentage of the full cost. Some coinsurance plans, however, require only the percentage until the deductible is met, then cover prescriptions at 100%.
  • Prescription deductible: A prescription deductible is separate from a medical deductible and needs to be met before coverage kicks in. Once the deductible is met, a copay applies, typically set according to the drug tier. For example, a plan may have a $500 prescription drug deductible, in addition to a $3,500 medical deductible.
  • Integrated deductible: An integrated deductible includes both medical and prescription costs. Once the full deductible is met, prescription copays or coinsurance applies.
  • Out-of-pocket maximum: Regardless of the type of plan you have and your state's rules, the ACA implemented an out-of-pocket maximum for the year. Similar to a deductible, the out-of-pocket maximum can be integrated with the medical plan or separate to prescription benefits. This benefit varies according to individual plans, but an ACA-compliant plan's 2020 out-of-pocket maximum for all healthcare (including prescriptions) is $8,200 for an individual and $16,400 for a family.

Formularies

The formulary is the list of drugs that your health plan will cover. Health insurers are allowed to develop their own formularies and adjust them as necessary.

Within the formulary, drugs are divided into tiers, with the least-expensive drugs typically being in Tier 1 and the most expensive drugs being in a higher tier.

Top-tier drugs tend to be specialty drugs, including injectables and biologics. For these drugs, the consumer will usually have to pay a coinsurance. Some states have restrictions on how much a health plan can require members to pay for specialty drugs in an effort to keep medications affordable.

Requirements

Under the ACA, a plan's formulary is required to cover:

A pharmacy and therapeutic (P&T) committee must also be responsible for ensuring the formulary is comprehensive and compliant.

Although every general category of medication must be covered, specific medications do not have to be covered by every plan.

One example is insulin. Every plan must cover rapid-acting insulin. However, a plan may cover its preferred brand, such as Novo Nordisk's NovoLog (insulin aspart), but not Lilly's Humalog (insulin lispro).

If your medication is not covered and you and your doctor believe it is an essential medication for your health, you can file an appeal.

Restrictions

Most formularies have procedures to limit or restrict certain medications. Common restrictions include:

  • Prior authorization: Before filling certain prescriptions you may need prior authorization, which means your doctor must submit the prescription to your insurance before coverage is approved.
  • Quality care dosing: Your health plan may check your prescriptions to ensure that the quantity and dosage are consistent with the recommendations of the FDA before approving coverage.
  • Step therapy: Some plans may require you to try a less expensive medication first before approving coverage of a more expensive drug.

Medicare

Unlike private health insurance plans, Original Medicare (Medicare Parts A and B) does not cover prescription drugs. Medicare Part D was established in 2003 to provide prescription coverage for Medicare enrollees and requires buying a private prescription plan.

There are a few avenues for obtaining prescription coverage once you're eligible for Medicare, which is typically age 65 (or younger if you meet disability qualifications). The options are:

  • 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

Donut Hole

The Medicare Part D "donut hole" was eliminated in 2020 through a provision in the ACA. When Medicare Part D was founded, this was one of its more confusing aspects: When prescription costs reached a certain threshold, patients were responsible for 100% of their drug costs until the out-of-pocket maximum was reached.

The ACA gradually reduced the size of the donut hole over several years, eliminating it entirely as of January 2020.

Medicaid

Medicaid is a joint Federal-State program that pays for medical assistance for individuals and families with low incomes and relatively few assets. Prescription drugs are covered with Medicaid in every state, with recipients paying either a small copay or nothing.

However, people who are dual-eligible for Medicaid and Medicare receive prescription drug coverage through Medicare Part D. Medicare offers an Extra Help program, which pays the premium and most of the cost-sharing for the prescription plan for Medicaid participants.

Other Options

If you have a grandmothered or grandfathered plan that doesn't cover prescription drugs, or if you're uninsured, stand-alone prescription drug insurance plans and discount plans are available.

These plans can be offered by insurance companies, pharmacies, drug manufacturers, or advocacy/membership organizations such as AARP.

Stand-Alone Drug Coverage

Prescription drug insurance is available as a stand-alone plan. It works similar to medical insurance: You pay an annual premium and then have a copay or coinsurance cost at the pharmacy.

These plans are often offered through large employers, or you can buy a policy on your own. The most well-known type of stand-alone plan is Medicare Part D, though private plans do exist. If you're considering this sort of plan, read the fine print very carefully so you know what is covered. 

Drug Discount Plan

While not insurance, drug discount plans are worth knowing about in this context, as they can help you bridge the gap when it comes to out-of-pocket costs.

Plans are often offered by chain pharmacies and drug manufacturers. On a discount plan, you are given a percentage off the total cost, similar to a using a coupon. You typically pay a monthly or annual fee and receive a card to present to your pharmacist. Some plans, like Refill Wise, are free to use but are only good at certain pharmacies.

If you need a prescription that is expensive, check the manufacturer’s website for a drug discount plan. Some coupons are only available for use without insurance, while others may cover the copay or coinsurance cost. 

Even with a discount plan, you may still pay a considerable amount for high-cost drugs.

A Word 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, prescription assistance programs are available to help.

Always be sure you are clear about why you need a certain prescription and whether or not a more affordable option might be a suitable substitute. Speak to your doctor about your options.

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Article Sources

Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial policy to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
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  3. Kesselheim AS, Avorn J, Sarpatwari A. The High Cost of Prescription Drugs in the United States: Origins and Prospects for Reform. JAMA. 2016;316(8):858-71. doi:10.1001/jama.2016.11237

  4. HealthPocket Inc. Almost No Existing Health Plans Meet New ACA Essential Health Benefit Standards. Updated March 7, 2013.

  5. U.S. Centers for Medicare & Medicaid Services. Out-of-pocket maximum/limit.

  6. U.S. Centers for Medicare & Medicaid Services. What Drug Plans Cover.

  7. Norris L. Obamacare: a game changer for MS patients. Updated January 13, 2016.

  8. Medicare Part D – prescription drug coverage. Updated May 2, 2019.

  9. U.S. Centers for Medicare & Medicaid Services. How to get prescription drug coverage.

  10. Bonakdar Tehrani A, Cunningham PJ. Closing the Medicare Doughnut Hole: Changes in Prescription Drug Utilization and Out-of-Pocket Spending Among Medicare Beneficiaries With Part D Coverage After the Affordable Care ActMed Care. 2017;55(1):43-49. doi: 10.1097/MLR.0000000000000613

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