Key takeaways:
A formulary is a list of generic and brand-name prescription medications covered by your health insurance plan.
Your health plan’s formulary is organized into tiers that contain different types of medications. The lower the tier, the less you can expect to pay out of pocket.
Formularies vary from plan to plan. If your prescription medications aren’t listed on your plan’s formulary, you may have to pay for them out of pocket or request a formulary exception.
When you’re comparing health plans, knowing which medications are covered, how they’re covered, and how much they’ll cost can save you a lot of frustration and money. That’s where a health plan’s formulary comes in. It’s an important tool for finding an insurance plan that fits both your prescription medication needs and your budget. Below, we’ll walk you through the basics of a medication formulary and show you how to use this tool when choosing a new plan.
What is a drug formulary?
A formulary, also known as a drug list, is a list of generic and brand-name prescription medications covered by a health plan. A health plan typically only helps pay for the medications that appear on this list.
Nonformulary medications are those not on the list. They typically include newer or select brand-name medications and come with much higher out-of-pocket costs or are not covered at all. These medications often require prior authorization before your health plan will cover them.
Some formulary medications are covered at 100%, meaning you have no cost-sharing. For others, you may have a copay, which is a fixed amount you pay for a medication. The copay is determined by your plan. You may also have to pay coinsurance, a percentage of the medication’s cost, which can add up to higher out-of-pocket spending.
What is the purpose of a formulary?
The purpose of a formulary is to help you and your prescriber choose medications that are effective, safe, and covered by your insurer, while also keeping costs down.
If you need a nonformulary medication, you and your prescriber can ask your insurance company to make an exception and cover it.
Most formularies organize medications into tiers based on cost. The lower the tier, the less you pay when filling your prescription.
What is a formulary tier?
A health plan’s formulary is typically divided into three or four categories, or tiers. Medications are placed in tiers based on whether they’re preferred or nonpreferred generics, preferred or nonpreferred brand-name treatments, or specialty products. When categorizing medications by tiers, health plans also look at the cost of the medications, how they compare to other medications used to treat the same condition, and their availability.
Here’s what typical formulary tiers look like:
Tier 1: Tier 1 medications are usually generics and have the lowest copays.
Tier 2: Tier 2 medications cost more than tier 1 medications. They are generally nonpreferred generics or preferred brand-name products.
Tier 3: Tier 3 generally includes nonpreferred brand-name medications. A health plan may also place a medication in tier 3 if a similar, lower-cost medication or a generic version is available in a lower tier. Your cost-sharing for these medications will be higher than those in tiers 1 and 2.
Tier 4: Tier 4 includes nonpreferred brand-name and specialty medications. Specialty medications generally treat rare or serious medical conditions. Newly FDA-approved medications are often placed in tier 4. Your out-of-pocket costs will be highest for tier 4 medications.
If your health plan doesn’t cover your medication, you don’t have to take “no” for an answer. Use this guide to write an appeal letter that can help you get the medication you need.
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Some health plans have more than four tiers, and others have only two or three, but the tier systems work in a similar way. You’ll usually pay less for medications in lower tiers, and more for those in higher ones.
When comparing plans, take a close look at the formularies for different plans offered by an insurance company. A company may list a medication in tier 1 for one plan, but in tier 2 for another plan. What’s more, don’t assume a tier 1 medication for one insurance company will be listed as a tier 1 medication by another insurance company. You may find the same medication listed in different tiers from one insurance provider to another.
Formulary types
There are different types of formularies. Some health plans combine formulary types to determine how medications are covered, while keeping costs down. Here’s what various formulary types mean:
Open formulary: The plan covers almost all medications with few restrictions. You’ll have more choices, but you’ll typically pay higher premiums for this flexibility.
Closed formulary: The plan only covers medications on its approved list. If your medication isn’t on this list, you’ll pay the full price — unless your prescriber gets prior authorization or an exception from your insurance provider.
Partially closed formulary: The plan covers most medications but excludes certain medications or entire classes, usually based on cost or clinical guidelines. For example, the plan might exclude coverage for acne medications like Retin-A for a certain age group. Or it might not cover any weight-loss medications.
Restricted formulary: The plan covers medications on its approved list. But extra steps like prior authorization or step therapy (trying other medications first) may be needed. This formulary type may require the use of generic medications whenever possible.
Incentive-based formulary: The plan uses financial rewards or penalties to encourage prescribers, pharmacists, and enrollees to choose preferred medications. For example, prescribers may receive incentives based on how well they stick to the formulary, pharmacists might get higher fees for dispensing formulary medications, and you may pay significantly less for using preferred medications.
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How are formularies created and why do they change?
Formularies are typically created by a team of healthcare professionals, including pharmacists and physicians. This group is often known as a pharmacy and therapeutics (P&T) committee. This committee reviews medications based on a few factors, including their safety, how well they work, and their costs.
Health plans may choose not to cover a prescription medication if:
It’s a brand-name medication with a generic version that’s covered.
The medication is considered less effective than other, similar options.
The medication is as effective as other options but costs much more.
Insurers usually update their formularies at the beginning of the plan year, but changes can also happen throughout the year. These updates occur when new medications, whether generic or brand name, become available or when the FDA finds safety concerns with a medication. Formulary changes may also be made when clinical guidelines recommend different treatments or medications. Sometimes, the FDA updates a medication’s label or usage guidelines, which can also affect coverage decisions.
Health plans may adjust their formularies after negotiating better prices or discounts with medication manufacturers. Another reason formularies might change is because insurers track how medications are being used and their impact on costs for both the plan and enrollees.
Where can I find my plan’s drug formulary?
If you’re considering a new health insurance plan, you can typically find a link for the formulary in the summary of benefits and coverage.
If you’re already enrolled in a plan, you can find your formulary on your health insurer’s website. You must know the name of your plan to check the formulary that applies to you. Look for your plan’s name on your insurance card.
If you can’t find a formulary, call the insurer and ask them to help you locate it online or send you a copy either by mail or email.
What if a medication is not on your plan’s formulary?
If your medication isn’t on your plan’s formulary, you may be able to request a formulary exception with help from your prescriber. This involves submitting paperwork and a letter of medical necessity that explains why you need the nonformulary medication. Your insurer will review the request and respond, often within a few days. In some cases, temporary coverage may be available while you wait.
If the exception is granted, your plan may agree to cover the medication long term. But it may place the medication in the highest formulary tier. That may mean high out-of-pocket costs.
If the request is denied, your plan must explain its decision, and you have the right to file an appeal. Your insurer is required to tell you about the appeals process, which can be handled internally. This means you ask your insurer to review the information and reconsider their decision. Appeals can also be done externally, which means an independent organization reviews the case and makes the call.
Frequently asked questions
A formulary is a list of medications covered by your health plan. Generic medications are products that work the same way as brand-name medications but usually cost less. Generic medications are usually placed in the lowest tier on most formularies.
If a medication is not on your formulary, it means your health plan doesn’t cover it. You may need to pay full price for it or request a formulary exception to try to get it covered.
Medications may be excluded from formularies if they are considered less effective or less safe, cost significantly more than other medications that work just as well, or a generic version is available. Health plans use these exclusions to help manage costs and ensure the use of medications that are safe and effective.
A drug list and a formulary are the same thing. Both refer to a set of medications that are covered by your health plan.
A formulary is a list of medications covered by your health plan. Generic medications are products that work the same way as brand-name medications but usually cost less. Generic medications are usually placed in the lowest tier on most formularies.
If a medication is not on your formulary, it means your health plan doesn’t cover it. You may need to pay full price for it or request a formulary exception to try to get it covered.
Medications may be excluded from formularies if they are considered less effective or less safe, cost significantly more than other medications that work just as well, or a generic version is available. Health plans use these exclusions to help manage costs and ensure the use of medications that are safe and effective.
A drug list and a formulary are the same thing. Both refer to a set of medications that are covered by your health plan.
The bottom line
A formulary is a health plan’s list of covered medications. This list helps keep medication costs down, especially for the insurer, while ensuring enrollees have access to safe and effective treatments. Health plans typically only cover medications listed on their formulary. If you need a medication that’s not included on your formulary, you can request an exception to try to get your plan to help pay for it.
When shopping for a new health plan, make sure any policy you consider covers the medications you need and check the tier levels for those medications. This will help you find the best plan for your needs.
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References
Goldberg, R. B. (2020). Managing the pharmacy benefit: The formulary system. Journal of Managed Care & Specialty Pharmacy.
HealthCare.gov. (n.d.). Appealing a health plan decision: External review.
HealthCare.gov. (n.d.). Appealing a health plan decision: Internal appeals.
Hydery, T., et al. (2024). A primer on formulary structures and strategies. Journal of Managed Care & Specialty Pharmacy.
Patient Advocate Foundation. (n.d.). Exploring drug tiers and formulary exceptions.
Patient Advocate Foundation. (n.d.). Understanding drug tiers.
