Your Drug Formulary: How It Works and What to Know

If you’ve ever had to jump through hoops to get a prescription covered by your health insurance, you have some firsthand knowledge of drug formularies.

When it comes to health coverage, drugs are different from other medical costs. Insurers don’t pay for prescriptions through coded billing, the way they pay for doctor visits, exams or hospital services. Instead they have formularies, or lists of approved drugs that they agree to help cover, so when you fill your prescription you don’t pay full price.

The formulary process is supposed to save money for you and your insurer, but it’s often a hassle. To get an expensive drug covered you may first have to try a similar one, or have your doctor prove you need it, and that can take weeks.

Even if you’re not facing such a situation right now, take a few minutes to learn about how drug formularies work. It might save you an arm and a leg, and a headache, down the road.

How drug formularies are determined

Medications on a formulary are chosen by a panel of experts independent of your insurance company, known as a Pharmacy and Therapeutics (P&T) Committee. These panels include doctors, nurses, pharmacists and other clinical experts.

The P&T Committee develops, manages and updates the formulary it works on. The group meets regularly to discuss new drugs, safety data, FDA-approved prescribing information, clinical trial results, and doctors’ recommendations in order to keep the formulary up to date. As a result, medications on the formulary may change at any time.

The committee typically leaves cost decisions up to the insurer or pharmacy benefits manager, which is a third-party company that operates the formulary. When two or more drugs are equally effective and safe, and similarly priced, both may be included in the formulary, though other factors may come into play.

How drug formularies work

Drug formularies are often defined as lists of drugs your health insurer agrees to pay for, at least partially, for any given disease or indication. While that’s true, it’s a complicated list that also includes a process for getting you the right drug for your condition, which may not be the first one your doctor prescribes.

Formularies are split into two to five groups based on price, called tiers. Each tier is typically associated with a copay, which is a flat rate you pay for the drug at the pharmacy. Here’s an example of a common four-tiered formulary, though yours may be slightly different:

• Tier 1, $20 copay: very low-cost drugs, mostly generics.
• Tier 2, $40 copay: higher-cost generic drugs and low-cost brand name drugs.
• Tier 3, $60 copay: brand name drugs for which there is no generic.
• Tier 4, $100+ copay: highest-cost drugs or specialty drugs like chemotherapy.

In some health plans, you have to pay full price for drugs until you meet your deductible before you can drop to paying only copays — that’s most common in a high-deductible plan. Instead of copays, other formularies may use coinsurance, in which you pay a percentage of the drug’s cost, typically 10% to 40%.

In addition, drug formularies vary by insurer and may have one of the following restrictions:

• Prior authorization: Your doctor may be required to get permission from your insurer to prescribe a specific drug.
• Step therapy: Before you are able to use a new or costly drug, you must first try a lower-priced drug for the same indication.

These processes can take a while, but they are intended to keep costs low for your insurer and you. In many cases, “there are newer and more expensive medications that, while innovative and helpful for certain patients, are not necessary for the larger population of patients,” says Jennifer Luddy, spokeswoman for Express Scripts, the nation’s largest pharmacy benefits manager. In many cases, a similar drug that works as well and costs less is available.

Working within your formulary

Your portion of drug costs will depend on what kind of insurance plan you have and which tier the drug is on. In a more guided health plan, such as an HMO or EPO, your doctor likely has a working knowledge of your formulary and knows which drugs to prescribe, or can easily look it up. If you have a PPO or point of service (POS) plan, you may find it useful to bring a copy of your formulary to your visits, whether you print it from your insurance portal or bring an electronic copy.

If a drug you’re taking is removed from the formulary, your insurer should give you written notice. If you’re a Medicare beneficiary and your drug becomes non-formulary, you may also be provided with 60 days worth of medication so you have time to switch to a different drug.

As part of your pharmacy benefits, you may be able to save money by changing how you get your drugs. Most formularies have an option to receive your drugs by mail rather than going to a brick-and-mortar pharmacy. If you have questions about your drugs, you can call the mail-order service and ask its pharmacists, just as you would if you went to a pharmacy in person.

You may not know that, like doctors and hospitals, pharmacies can also belong to a provider network. Insurers often have preferred network pharmacies that offer lower prices to both you and your insurer for certain drugs. “Some plans offer broad networks, but others also may offer a ‘preferred pharmacy network,’ ” Luddy says. “If your plan has a preferred network, you likely will have a lower copay if you use a pharmacy in that preferred network.”

Check your health plan’s website to see if there is a preferred or mail-order pharmacy listed. And while you’re on the site, you might find other cost-saving tips, too.

Lacie Glover is a staff writer at NerdWallet, a personal finance website. Email: lacie@nerdwallet.com. Twitter: @LacieWrites.