What is a drug formulary? How do prescription tiers work? If you’re shopping for health insurance and take prescription drugs, you likely have questions about the prescription coverage offered by the various plans.
The good news is that all of the plans available today have to cover your pre-existing conditions. They can’t deny your application based on your medical history—they don’t even ask about your medical history anymore. But covering your pre-existing condition doesn’t mean that every carrier will cover the specific medications you use. And the ones that do cover them might have very different out-of-pocket costs for your drugs.
Here are the terms and concepts you need to understand to make sense of it all:
Formulary is just another word for the health insurance policy’s covered drug list. If a drug is on the formulary, it’s covered. If it’s not on the formulary, it’s not covered. If your drug is not covered, there’s an exceptions request process you and your doctor can use if another covered drug won’t work. And if your drug is on the formulary but your health insurer denies the claim, there’s an appeals process that can be used (additional details are in the 2017 Benefit and Payment Parameters).
For 2014 and 2015, the requirement was that a health plan’s formulary had to cover the greater of
- at least one drug in every US Pharmacopeia category and class OR
- the same number of drugs in each category and class as the state’s benchmark plan (here are Colorado’s benchmark plans for 2014-2016, and for 2017 and beyond).
In 2015, HHS published additional guidance that requires health plans to also have a pharmacy and therapeutic (P&T) committee that reviews the formulary to ensure that it’s comprehensive.
Although there’s significant regulatory oversight for formularies, they still vary considerably from one carrier to another. And while a drug might be on the formulary with several carriers, it might be in different tiers for different plans.
Formularies can be changed mid-year in most states, although consumer advocacy groups have been working to limit this practice. For health plans sold through Healthcare.gov, HHS requires that the formulary be kept up-to-date, and any mid-year formulary changes must be updated in the formulary prior to the change taking place.
Health plans assign covered drugs to one of four tiers. Different carriers will assign the same drug to different tiers, and other carriers might not cover that specific drug at all—it varies significantly from one carrier to another.
In general, the lower the tier number, the less you’ll pay for the drug. So your out-of-pocket costs for a Tier 1 drug will be relatively small, while your out-of-pocket costs for a Tier 4 drug could be very significant.
A copay is a fixed amount that you pay for a particular service (for example, a flat $40 fee to visit a primary care physician, a $25 fee for a Tier 1 medication or $570 fee for a Tier 3 medication). Many health plans apply copays to prescription coverage, particularly Tiers 1 through 3.
Coinsurance means you pay a percentage of the cost. If your health plan covers Tier 4 drugs with 40% coinsurance, that means you pay 40 percent of the price of the drug, and your health insurance company pays the rest. This applies to whatever the plan’s negotiated cost is for the drug, as opposed to the “retail” price. And it’s important to note that you may also have a deductible (see below) that must be paid each year before the coinsurance kicks in.
The deductible is the pre-determined amount that you pay (generally much larger than a copay) for services not covered by a copay, before your health insurance plan starts to pay benefits. Deductibles on bronze plans can be in excess of $6,000, while some gold plans and cost-sharing subsidy silver plans are available with no deductible at all.
- Health plans can have a combined medical/prescription deductible, which means that prescription costs are counted together with other medical costs—and paid in full by the patient—and benefits don’t kick in until the combined deductible is met.
- Plans can also be structured so that they have separate medical and prescription deductibles. For example, a plan might have a $3,000 medical deductible and a $500 pharmacy deductible. Once you’ve spent $500 on medications, the drug coverage (with copays, or coinsurance) kicks in for the rest of the year, regardless of whether or not you’ve met your $3,000 deductible for other medical services.
Out-of-pocket maximum (OOPM)
Thanks to the ACA, all new health plans must have limits on out-of-pocket costs (these do not apply to grandmothered or grandfathered plans). For 2016, the highest out-of-pocket allowed is $6,850 (for a family, it’s $13,700). For 2017, that’s going up to $7,150 (for a family, it will be $14,300).
Health plans can have out-of-pocket limits below these amounts, but not above them.
The out-of-pocket limit applies to covered services provided by in-network facilities and doctors. If you go outside the plan’s network, your out-of-network costs could be higher, and in some cases, might be unlimited. But let’s assume you stay in-network.
For drugs covered by your plan, your total drug costs—whether it’s copays, coinsurance, and/or deductibles—will apply towards your plan’s OOPM, along with any other out-of-pocket costs you incur for covered treatment. Once the total for the year reaches your plan’s OOPM, all of your covered treatments—including covered prescription drugs—will be paid in full by the insurance company for the rest of the year.
So if you have a condition like MS or cancer that requires Tier 4 specialty drugs that are only available with coinsurance coverage and that cost thousands of dollars per month, you’ll only have to keep paying that coinsurance until you’ve reached the plan’s OOPM for the year. After that, the insurance company will pick up the full cost of the medications for the remainder of the year.