An Overview of Prescription Drug Insurance

Prescription drug spending in the United States grew to nearly $348 billion in 2020, accounting for more than 8% of total health expenditures. On a per-capita basis, inflation-adjusted retail prescription drug spending in the U.S has ballooned over the last six decades, growing from $90 in 1960 to $1,025 in 2017, and increasing even more, to $1,376, by 2020.

According to the CDC, 48.6% of adults have used at least one prescription drug in the past 30 days, 24% have used three or more, and 12.8% have used five or more.

Given the cost of prescriptions and their widespread use, it's clear that 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, and out-of-pocket caps continue to rise.

That means that even Americans who are enrolled in a plan with prescription drug coverage may incur substantial costs when they fill their prescriptions.

This article will explain the rules and regulations that apply to drug coverage and the types of prescription drug coverage that are available.

Healthcare Reform

Prior to the Affordable Care Act (ACA), close to 20% of individual/family health 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 individual and small group health plans with effective dates of 2014 or later.

Large group plans are not required to cover the ACA's essential health benefits other than preventive care. However, the vast majority of these plans do provide prescription drug coverage. (In most states, "large group" means an employer-sponsored plan that has at least 51 employees, although there are a few states that set the threshold for large group at 101 employees.)

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 various benefit designs that health plans can use to cover prescription drugs:

• 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 or coinsurance 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 includes prescriptions: As long as the plan is not grandmothered or grandfathered, it will have to cap total in-network out-of-pocket spending at a no more than a level determined each year by the federal government, and both prescription and medical costs have to be counted toward the plan's out-of-pocket cap (for 2022, the maximum out-of-pocket limit is $8,700 for a single person and $17,400 for a family; these limits increase to $9,100 and $18,200, respectively, in 2023).
  However, the rules are different for Medicare Advantage plans, as integrated drug coverage on those plans does not count towards the plan's out-of-pocket limit. This is because Medicare Part D prescription drug coverage (which can be obtained on its own or as part of a Medicare Advantage plan) does not have a cap on out-of-pocket costs. Fortunately for millions of Medicare beneficiaries, this will change as of 2025, under the Inflation Reduction Act.

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, although they must comply with various state and federal rules.

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, usually 4, 5, or 6.

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, the formularies for plans sold in the individual and small group markets are required to cover:

• At least one drug in every U.S. Pharmacopeia category and class
• The same number of drugs in each category and class as the benchmark plan selected by the state

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).

The same concept applies to contraception. Although the ACA requires health plans to fully cover (ie, without copays, coinsurance, or deductibles) all types of FDA-approved contraception for women, each health plan can decide which specific contraception they'll cover within each type, and can require cost-sharing for the others—or not cover them at all.

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 healthcare provider 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
• A Medicare Advantage plan that includes Part D prescription drug coverage (these Medicare Advantage plans are known as MA-PDs). The majority of Medicare Advantage plans are MA-PDs.
• Supplemental coverage from Medicaid (the coverage will be via Part D) or your employer or a spouse's employer (including retiree coverage that's considered comparable to Part D coverage).

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 beneficiaries who meet certain financial qualifications can enroll in an Extra Help program, which pays the premium and most of the cost-sharing for the prescription plan.

Other Options

If you have a grandmothered or grandfathered plan that doesn't cover prescription drugs or that limits your coverage to only generic 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.

The most well-known type of stand-alone plan is Medicare Part D, though privately-run plans do exist. If you're considering this sort of plan, read the fine print very carefully so you know what is covered. 

With the exception of Medicare Part D, most of the stand-alone drug plans that are marketed to consumers are actually drug discount plans, which is not the same thing as drug insurance.

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'll get a certain percentage discount, similar to using a coupon. You typically pay a monthly or annual fee and receive a card to present to your pharmacist. But these plans can also be obtained for free, such as the discount program offered by GoodRx. 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.

Summary

Most health plans in the U.S. have integrated prescription drug coverage. However, Original Medicare does not; beneficiaries need to obtain Medicaid Part B prescription drug coverage if they don't have prescription drug coverage from an employer.

In the individual and small group markets, all health plans with effective dates of 2014 or later are required to include prescription drug coverage. And the formulary (covered drug list) must be developed according to regulations that are designed to protect consumers and ensure that their coverage is adequate. Medicaid also includes prescription drug coverage. Large group health plans are not specifically required to include drug coverage, but virtually all of them do, in order to keep their benefits package competitive.

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 healthcare provider about your options.