Understanding Your Health Plan Drug Formulary

A drug formulary is the list of prescription drugs, both generic and brand name, that are covered by your health plan. Each health plan develops its own formulary, which is why different drugs are covered by different plans.

This article will explain how formularies are developed and what you need to understand about your plan's formulary in order to get an idea of how much you're likely to spend when you fill prescriptions.

The purpose of your health plan's formulary is to steer you to the least costly medications that are sufficiently effective for treating your health condition. Your health plan will generally not cover a medication that is not listed on its formulary, although there's an appeals process that you and your healthcare provider can use if there is no suitable alternative on the formulary.

Health plans frequently ask healthcare providers to prescribe medications included in the formulary whenever possible. Many health plans review whether or not a healthcare provider is using the health plan formulary. If not, the health plan may communicate with the healthcare provider and encourage her to use medications on the formulary.

A Dr. Mike tip: If you don't understand your plan's drug benefits, you may be surprised when you have to pay the full retail cost for your prescription.

Who Chooses the Drugs on the Formulary?

In most health plans, the formulary is developed by a pharmacy and therapeutics committee composed of pharmacists and physicians from various medical specialties (this is required for prescription drug coverage under ACA-compliant individual and small group health plans as of 2017).

The committee reviews new and existing medications and selects drugs to be included in the health plan's formulary based on safety and how well they work. The committee then selects the most cost-effective drugs in each therapeutic class. A therapeutic class is a group of medications that treat a specific health condition or work in a certain way. For example, antibiotics are used for the treatment of infections.

Under reforms brought about by the Affordable Care Act, individual and small group plans must include at least one drug from every U.S. Pharmacopeia (USP) category and class, OR the same number of drugs in each USP category and class as the state's benchmark plan, whichever is greater (the federal government maintains a website that has detailed information about the benchmark plan in each state).

Most employer-sponsored plans use pharmacy benefits managers (PBMs) who maintain and update the formulary. Usually, the formulary is updated yearly, although it is subject to change throughout the year unless a state has implemented rules to prevent this. Some changes depend on the availability of new drugs, and others occur if the Food and Drug Administration (FDA) deems a drug to be unsafe.

What Is a Formulary Tier?

Drugs on a formulary are usually grouped into tiers, and your co-payment or coinsurance (both described below) is determined by the tier that applies to your medication. A typical drug formulary includes four to six tiers. The lowest tier will have the lowest cost-sharing, while drugs on the highest tier will have the highest cost-sharing.

Tier 1: The lowest co-payment and usually includes generic medications.

Tier 2: A higher co-payment than Tier 1 and can include non-preferred generics and/or preferred brand name medications.

Tier 3: Has an even higher co-payment and can include preferred or non-preferred brand name medications.

Tier 4, 5, and 6: Depending on the plan, your highest-cost drugs will typically be in Tier 4, 5, or 6. Your health plan may place a medication in the top tier because it is new and not yet proven to be a better alternative than existing medications (although it does have to be approved by the FDA). Or, the medication may be in the top tier because there is a similar drug on a lower tier of the formulary that may provide you with the same benefit at a lower cost. Specialty drugs are included in the highest tier. Drugs in the top tier are typically covered with coinsurance rather than a copay, so your out-of-pocket costs at this level could be quite high until you meet your plan's out-of-pocket maximum for the year.

For some of these drugs, your health plan may have negotiated with a pharmaceutical company to obtain a lower price. In return, your health plan designates the medication as a "preferred drug" and hence makes it available in a lower tier, resulting in lower cost-sharing for you.

Your health plan may also provide you with a list of medications that are not covered and for which you have to pay the full retail price. This list may include experimental medications, over-the-counter medications, and so-called lifestyle drugs, such as those used to treat erectile dysfunction or weight loss. But other health plans cover some of these medications; there's not a one-size-fits-all when it comes to drug formularies.

This is why it's important to carefully compare drug formularies if you have an option to choose from among multiple health plans. This applies to people shopping for coverage in the health insurance exchange, but also to people whose employer offers a choice of two or more health plans.

What Is a Co-payment?

The co-payment is your share of the cost of a prescription when it's designated as a flat-dollar amount. For example, if your plan covers Tier 1 drugs with a $20 copayment and Tier 2 drugs with a $40 copayment, those are the amounts you'll pay when you fill a prescription, and the remaining cost is paid by your health plan (after you've paid your prescription drug deductible, if your plan has one).

What Is Coinsurance?

If your health plan uses coinsurance for prescription coverage (very common for drugs in Tier 4 and above, even if lower-tier drugs are covered with a copay), it means you'll pay a percentage of the cost of the drug, rather than a set copay amount.

So if a Tier 5 drug costs $1,000 (after the discount negotiated between your plan and the pharmacy) and your plan has 30% coinsurance for Tier 5, that means you'd be responsible for $300 of the cost when you fill the prescription. 

For some conditions—like multiple sclerosis (MS), for example—all of the available drugs are considered specialty drugs, which means they are typically in Tier 4 or above, and coinsurance often applies.

The result can be very high cost-sharing for the insured, but the total out-of-pocket limits imposed by the ACA result in the health plan eventually picking up 100% of the cost, once the member has met her cost-sharing limit for the year (the upper limits on out-of-pocket costs do not apply to plans that are grandfathered or grandmothered; these plans can continue to set out-of-pocket caps that are higher than the amounts allowed under the ACA). 

In 2022, the maximum out-of-pocket for in-network essential health benefits (including prescription drugs that are on a health plan's formulary, as well as all the other covered in-network care the patient receives during the year) is $8,700 for a single individual. But many health plans have out-of-pocket caps that are well below these upper limits.

It's important to note that Medicare Part D (prescription drug coverage for Medicare beneficiaries) does not have a cap on out-of-pocket costs. But that will change as of 2025, under the Inflation Reduction Act. At that point, Part D out-of-pocket costs will be capped at $2,000 (the cap will be inflation-adjusted in future years).

Do Formularies Have Any Restrictions?

Most health plan formularies have procedures to limit or restrict certain medications. This is done to encourage your healthcare provider to use certain medications appropriately, as well as to save money by preventing medication overuse. Some common restrictions include:

Prior Authorization: a process by which your healthcare provider must obtain approval from your health plan for you to obtain coverage for a medication on the formulary. Most often, these are medications that may have a safety issue, have a high potential for inappropriate use, or have lower-priced alternatives on the formulary.

Quality Care Dosing: a process in which your health plan checks prescription medications before they are filled to ensure that the quantity and dosage is consistent with the recommendations of the FDA

Step Therapy: a process in which your health plan requires you to first try a certain medication to treat your health condition before using another medication for that condition. Usually, the first medication is less expensive.

Are There Exceptions to These Rules?

Your health plan may be open to making an exception for several situations:

• You ask the plan to cover a medication that is not on the formulary, or to continue to cover a drug that is being removed from the formulary.
• You ask the plan to waive coverage restrictions or limits on your medication.
• You ask the plan to provide the medication with a more affordable co-payment.

In general, your health plan will consider these exceptions if their lack of coverage of your medication would cause you to use a less effective drug or cause you to have a harmful medical event.

If your request for an exception is turned down, you have the right to appeal that decision. All health plans have an appeal process, which may include impartial people who are not employed by the plan (the ACA requires insurers to have both internal and external appeals processes).

Even if your appeal is denied you can still choose to have your healthcare provider prescribe the medication, but you will be responsible for the full charge of the drug.

Some Advice From Dr. Mike

Here are some tips from Dr. Mike

Know Your Health Plan's Formulary

All health plans have different formularies, and it is important for you to understand your plan's formulary. When you enrolled, you should have received information that describes the formulary and lists all of the approved medications, along with an explanation of the tier co-payments and/or coinsurance. You can also access your plan's formulary online.

If you have not received a formulary or can't figure out how to access it online, call the customer service number on your drug card to request one.

Talk With Your Healthcare Provider

If you need a prescription, talk with your healthcare provider about prescribing a generic drug or a preferred brand name drug if it is appropriate for your health condition. If a more costly medication is necessary, make sure your healthcare provider is familiar with your health plan's formulary, so that a covered medication is prescribed if possible.

Choose Your Health Plan Wisely

If you have a choice of health plans and require medications for a chronic illness, you should look at the different formularies and choose a plan that covers your medications. But if you take multiple medications, you may find that none of the available health plans have formularies that include all of your medications.

In that case, you'll want to check to see which health plans cover your most expensive medications, with the understanding that the trade-off might be having to pay full price for the less costly medications. Again, this is a situation when you can talk with your healthcare provider to see if there's another medication that is on the formulary and that could be substituted for a drug you currently take.

Summary

A formulary is a list of drugs that a particular health plan will cover. Formularies are developed by committees that include pharmacists and physicians, and the ACA has rules that individual and small group health plans must follow in order to ensure that their formularies are adequate.

The covered drugs on each health plan's formulary will generally be divided into tiers—usually four to six tiers—with the lowest-cost drugs in lower tiers and the highest-cost drugs in higher tiers. It's common for health plans to cover lower-tier drugs with a modest copay, but to require enrollees to pay a percentage of the cost of higher-tier medications.

A Word From Verywell

If you're struggling to pick a health plan that will cover you prescription drugs, know that there are lots of people you can turn to for help. Your employer's HR department, a local broker or Navigator, and even your pharmacist.

And it's important to reconsider your coverage options each year, during open enrollment (the specific dates and plan options will vary depending on what type of coverage you have). Your prescription needs may have changed since the last time you selected your coverage, or the available health plan options may have changed. Switching to a different plan might end up saving you money each time you fill your prescriptions.