Posted September 30, 2019 by Mitch Fraker - See Editorial Guidelines(Last Updated On: July 8, 2020)
Prescription drug coverage is now a part of all health insurance plans. However, how much they cover, and more importantly, how much you’ll have to pay out of pocket, will vary based on your plan and which tier the drug falls under.
What Is a Drug Formulary?
A drug formulary (also known as a drug list) has two basic parts. First, it will list all of the medications that the insurer has chosen to cover. Secondly, it lists a formula or set price for how much of the cost is paid by the insurance company and how much you will have to pay out of pocket.
There are three types of drug formularies. Open formularies cover nearly all drugs, although the insurer may choose to exclude certain drugs. If they do, they will list the drugs that aren’t covered in your insurance plan.
Closed formularies only cover the drugs that the insurer chooses to cover. These will be listed in your health plan. You can request that they cover a drug for you, but there is no guarantee.
The third, and most common type of formulary is tiered. Drugs are grouped into tiers based on their price. The insurer will usually choose to cover different amounts for each tier. This means that they will cover most of the price for lower cost drugs, but you can end up paying a hefty price for higher tier drugs.
How Are Drug Formularies Determined?
It’s a common misconception that insurance companies alone determine which drugs to cover in their formulary. In fact, the process is complicated. Medical experts work with the insurance company to determine which drugs should be covered. These experts are known as P&Ts, or Pharmacy and Therapeutics committees.
The P&T committee will review clinical research and determine which drugs are effective for health conditions. Then they will look at the price of the drugs. The committee will determine which drugs should be covered based on the medical need and the cost of the drug.
In many cases, several drugs may treat the same health condition. In these cases, the lower price drugs will be covered or will be on the lower tier. More expensive drugs won’t be covered, or they will be on a higher tier, costing you more out of pocket.
How Much Will You Pay?
Most prescription drug plans will have a set co-pay that varies by the tier, but not be the specific drug. The insurance company will pay the majority of the cost of the drug, and you will pay the co-pay out of pocket. The co-pay is usually the same for all drugs of the same tier. This makes it easier for you to budget your healthcare costs and prevents you being surprised by the price when you pick up a drug from the pharmacy. However, some plans use a percentage instead of a set co-pay. This means you will pay a specific percentage of the cost of the drug. Many plans will have co-pays for lower tier drugs, and a percentage for the highest tier drugs.
Overview of Drug Tiers
It’s important to know that drug tiers aren’t standardized. Different plans can have drugs in different tiers, and the number of tiers and copayments can vary as well. This information is meant to give a general idea of the different tiers, but you will need to check your plan for more specific information. It’s important to note that if there is both a generic and a brand name for a drug, the brand name will be on a higher tier to encourage you to choose the generic equivalent. Generic drugs are legally required to be as safe and effective as their brand name counterparts.
Tier 1 drugs are the cheapest drugs for the insurance company, and they have the cheapest co-pay for you. Generally, you’ll find common low-cost generic drugs in Tier 1. Some plans include inexpensive brand name drugs in this tier as well.
Higher price generic drugs fall into this category. Lower price brand name drugs are common in this category as well. The co-payment will be more than tier 1 drugs, but still very affordable.
Higher price brand name drugs fall into this category. If your prescriptions are tier 3, you may want to talk to your doctor about switching you to a lower tier drug in the same class. Tier 3 drugs are fairly expensive, both for your insurance provider and yourself.
Many insurers classify certain drugs in specialty tiers. Very expensive or complex drugs like those used to treat cancer often fall into this tier. You will usually have to pay a percentage of the retail price for these drugs. Another type of specialty tier is used for maintenance type drugs. Drugs for high cholesterol and diabetes medication. Insurance companies sometimes offer these types of drugs at a very low copay to encourage patients to take care of their health, believing that prevention is less expensive than the crisis that can occur due to lack of proper treatment.
Common Formulary Terms
Preferred vs Non-Preferred
Many insurers use the terms preferred and non-preferred. Both generic and brand-name drugs can be preferred. Preferred drugs have been determined by the P&T committee to be among the most effective and cost effective. Non preferred drugs will be of a higher tier and have a higher copay than their preferred counterparts.
Prior Authorization, Certification, and Exception are all terms used for medications that requires an extra step before the insurer will cover them. In most cases, your physician will need to fill out a form detailing why you require that particular medication. Your insurer will review it, then make a decision on whether or not to cover it.
Situations in which a drug may require a prior authorization are:
- It’s a brand name drug with a generic equivalent
- More expensive than other drugs in the same class
- Not considered medically necessary
- At a higher dose than normal or off label use
If you aren’t aware that the drug requires a prior authorization, you will likely find out when you drop the medication off at your pharmacy. Most pharmacies will contact the doctor and request a PA, but it’s a good idea to call them yourself as well. For most medications, it will take one or two business days to obtain a prior authorization for your prescription.
Some medications and procedures may require you to go through step therapy. This is when the insurer has designated specific steps to treat a condition, and will only cover medications and procedures when these steps are followed. For example, you may be required to try a similar generic or preferred drug before the insurer will cover a more expensive one.
Medicare Part D
While the specific drugs on the Medicare Part D plans vary, Medicare does have some specific guidelines. The most important one is that Part D insurers must cover at least two drugs in each class.
These classes are:
- Antiretrovirals (Aids treatment)
In most instances, you should be able to work with your doctor to choose a prescription drug that is covered on your plan. Since many drugs treat the same conditions, it’s important to know which drugs are on your plan’s formulary before you visit the doctor.
Making the Most of Drug Tiers
Medical care can be quite expensive. Co-pays, drugs that aren’t on the formulary, and the donut hole can all have a significant impact on your budget. Making the most of drug tiers can put them to work for you, and allow you to save money on your prescription drug costs.
Finding and Using Your Formulary
You’ll find your formulary in your copy of your insurance plan as well as the website for your health plan. It’s best to have a hard copy of it and bring it with you to all doctors appointments.
If your doctor wants to prescribe a drug that isn’t on the formulary, ask if there is one that is on the formulary that will work for your condition. In most cases, there will be a similar drug on the formulary, which can result in significant out of pocket savings for you.
Keep in mind that doctors have many patients, and there is no way they can keep track of all the drugs that are covered by specific plans. They should be happy to help you choose the drug that is most affordable and effective for you if you provide them with the information they need to do so.
Choose Preferred or Generic Drugs
You should always ask if there’s a preferred or generic version of a drug that you are prescribed. In most cases, your prescription will allow you to use either the brand name or generic version if available, so you should tell your pharmacy that you prefer a generic version. Preferred and generic drugs will help you save money. Since they are cheaper for you and your insurer, they will help keep you from falling into the donut hole or coverage limit as well as save you on your co-pay.
Choosing a Plan
When you are choosing your insurance plan, be sure to take a look at the associated formularies. If you take prescription drugs for certain conditions on a daily basis, it’s important to see if they are on the plan’s formulary ahead of time. Drug Tiers are designed to help you get the prescriptions you need at the lowest price while saving your insurer money as well. Lots of time and effort goes into ensuring that formularies are fair for you and your insurance company. Understanding drug tiers will help you to make the most of this benefit.
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