Formulary

What Is Formulary?

A formulary, also known as a drug list, is a comprehensive inventory of prescription medications that a Health Insurance plan or a Pharmacy Benefit Manager (PBM) agrees to cover. Within the broader realm of Healthcare Finance, a formulary serves as a crucial tool for managing the financial aspects of Prescription Drugs, influencing both patient access and cost-sharing. This curated list guides healthcare providers and patients in selecting medications that are eligible for coverage under their plan's benefits, ultimately impacting the out-of-pocket expenses for treatments⁴², ⁴³. Plans generally only help pay for drugs included on their formulary⁴⁰, ⁴¹.

History and Origin

The concept of a drug formulary evolved significantly with the growth of managed care organizations in the latter half of the 20th century. As healthcare costs began to escalate, health plans sought mechanisms to control expenditures while ensuring access to necessary medications. Formularies became a nearly universal tool in the management of drug benefits³⁹.

A pivotal moment for formularies in the United States was the passage of the Medicare Modernization Act (MMA) of 2003, which introduced Medicare Part D prescription drug coverage. This legislation mandated that Medicare drug plans include formularies, requiring them to cover a wide range of prescription drugs, with specific provisions for certain protected classes like cancer and HIV/AIDS treatments³⁷, ³⁸. The MMA also stipulated that plans must have a process for beneficiaries to request exceptions to the formulary if a non-preferred drug is medically necessary³⁶. The design and regulation of these formularies continue to be refined, with pharmacists and doctors updating these lists annually based on the latest medical information to include safe and effective drugs³⁵.

Key Takeaways

• A formulary is a list of prescription drugs covered by a health insurance plan, serving as a primary tool for managing drug costs.
• Most formularies organize medications into different cost-sharing categories, known as Drug Tiers, which dictate the patient's out-of-pocket expense.
• Patients typically pay less for Generic Drugs on lower tiers, while Brand-Name Drugs and Specialty Drugs on higher tiers incur greater costs.
• Formularies are dynamic and can change, requiring patients to periodically review their plan's drug list to understand coverage.
• Patients may request a formulary exception for medications not on the list if medically necessary.

Interpreting the Formulary

Understanding a formulary is essential for managing personal healthcare expenses. Formularies are typically structured into various Drug Tiers, each corresponding to a different level of Cost-Sharing for the patient³², ³³, ³⁴. Drugs in lower tiers generally have lower costs, often requiring a small Copayment or minimal Coinsurance. As you move up the tiers, the patient's financial responsibility increases.

For example, Tier 1 often includes preferred generic drugs, Tier 2 covers generic drugs, Tier 3 lists preferred brand-name drugs, and Tier 4 may include non-preferred drugs or specialty medications, which carry the highest out-of-pocket costs³⁰, ³¹. Patients should review their plan's specific formulary to determine the tier placement and associated costs for their prescribed medications. If a needed medication is not on the formulary (non-formulary), it means the plan typically does not cover it, and the patient may be responsible for the full cost²⁸, ²⁹. In such cases, patients or their prescribers can often request a formulary exception from the insurance company²⁶, ²⁷.

Hypothetical Example

Consider Sarah, who has a new health insurance plan. She needs to refill her prescription for a blood pressure medication and also start a new medication for a recently diagnosed condition. To understand her potential costs, Sarah consults her plan's formulary online.

For her blood pressure medication, she finds that the generic version is listed in Tier 1. This means she will only pay a $10 Copayment for a 30-day supply after meeting her Deductible. However, for the new medication, she discovers it is a newer brand-name drug placed in Tier 4. This tier requires 40% Coinsurance after the deductible, which could amount to a significant cost given the drug's high retail price. If the total annual cost for this Tier 4 drug, combined with other medical expenses, pushes her over her plan's Out-of-Pocket Maximum, the plan would then cover 100% of additional covered costs for the remainder of the year²⁵.

Practical Applications

Formularies are a cornerstone of modern Health Insurance and are widely applied across various aspects of the healthcare system:

• Insurance Plan Design: Insurers and Pharmacy Benefit Managers (PBMs) use formularies to design benefit packages, balancing coverage with cost control. The specific drugs included, and their tier placement, influence the overall premium and Cost-Sharing structure for policyholders²⁴.
• Prescription Drug Costs: Formularies directly impact patient out-of-pocket expenses by determining which drugs are covered and at what level of financial responsibility. The use of Generic Drugs on lower tiers is often encouraged to reduce costs for both the patient and the insurer²², ²³.
• Medication Management: Healthcare providers use formularies to guide prescribing decisions, often opting for formulary-preferred drugs when clinically appropriate. Formularies also facilitate processes like Prior Authorization and Therapeutic Interchange for certain medications.
• Government Programs: Programs like Medicare Part D and Medicare Advantage plans operate with formularies approved by Medicare, ensuring certain standards of coverage while allowing private plans flexibility in their specific drug lists²⁰, ²¹.

Limitations and Criticisms

While formularies are designed to manage costs and ensure access to effective medications, they face several criticisms:

• Restricted Access: A primary concern is that formularies can limit patient access to specific drugs, especially newer Brand-Name Drugs or non-preferred options that may be medically necessary but are not included or are placed in high-cost tiers¹⁸, ¹⁹. Patients may be forced to pay significantly higher out-of-pocket costs or go through a cumbersome exceptions process to get a non-formulary drug¹⁶, ¹⁷.
• PBM Influence and Rebates: A major point of contention involves the role of Pharmacy Benefit Managers (PBMs) in shaping formularies. Critics argue that PBMs, who negotiate rebates from drug manufacturers, may be incentivized to favor drugs that offer higher rebates, even if lower-cost alternatives exist or if those drugs lead to higher overall costs for patients or health plans¹⁴, ¹⁵. Recent Federal Trade Commission (FTC) reports have highlighted concerns that dominant PBMs may be inflating drug costs through various practices, including significant markups on certain drugs and steering patients toward affiliated pharmacies, thereby impacting formulary design and patient expenses¹², ¹³.
• Cost-Shifting to Patients: The tiered structure of formularies, particularly the high Coinsurance for specialty and higher-tier drugs, can lead to substantial financial burdens for patients, even those with insurance coverage¹⁰, ¹¹. This Cost-Sharing can be particularly impactful for individuals requiring expensive, ongoing treatments.
• Lack of Transparency: The process by which drugs are added or removed from a formulary and how tiers are determined can often lack transparency, making it difficult for patients and even providers to understand the rationale behind coverage decisions.

Formulary vs. Drug Tiers

While closely related and often used interchangeably in casual conversation, a formulary and drug tiers are distinct concepts.

A formulary is the comprehensive list of all Prescription Drugs that a health insurance plan covers. It is the complete inventory of medications for which the plan will provide financial assistance.

Drug tiers, on the other hand, are a component or structure within a formulary. They are categories into which a formulary's drugs are grouped, primarily based on cost. Each tier has a different level of Cost-Sharing for the patient, typically with lower tiers requiring smaller copayments or coinsurance, and higher tiers requiring greater financial responsibility. For example, a formulary might have five tiers, with Tier 1 for preferred generics and Tier 5 for high-cost Specialty Drugs. Thus, while the formulary tells you which drugs are covered, the Drug Tiers tell you how much you will pay for those covered drugs⁸, ⁹.

FAQs

How often does a formulary change?

Health insurance plans typically update their formulary annually, often at the start of a new plan year. However, changes can occur throughout the year due to new drug approvals, market availability, or safety alerts. Plans are usually required to notify members of significant formulary changes⁶, ⁷.

Can I get a drug that's not on my plan's formulary?

Yes, it may be possible to get a drug not on your plan's formulary, though you might need to pay the full cost out-of-pocket⁵. Alternatively, you or your prescriber can request a "formulary exception" from your health plan. This process typically involves demonstrating that the non-formulary drug is medically necessary and that covered alternatives would be less effective or cause adverse effects³, ⁴.

Why are some medications excluded from formularies?

Medications may be excluded from a formulary for several reasons, including the availability of equally effective but lower-cost Generic Drugs or preferred Brand-Name Drugs, high cost without a significant clinical advantage, or unfavorable rebate agreements between manufacturers and Pharmacy Benefit Managers¹, ². The goal is generally to promote cost-effectiveness while ensuring a range of therapeutic options.