Formulary

How It Works

Formularies are the primary tool insurers use to manage drug spending. Drugs on lower tiers (preferred generics) have the lowest copays, while drugs on higher tiers (non-preferred brands, specialty drugs) have the highest cost-sharing. PBMs negotiate with manufacturers to determine formulary placement: a manufacturer may offer larger rebates to get on a lower tier. Patients whose prescribed drug is not on the formulary may need to pay the full cost, request an exception, or switch to a covered alternative. Formularies change annually, so a drug covered this year may not be covered next year.

Related Terms

• Pharmacy Benefit Manager (PBM) — A company that acts as a middleman between drug manufacturers, insurers, and pharmacies — negotiating drug prices, managing formularies, and processing claims.
• Rebate — A discount paid by a drug manufacturer to an insurer or PBM after a sale, reducing the effective price below the list price.
• Prior Authorization — A requirement by an insurer that a patient's doctor must get approval before the plan will cover a specific drug — used to control costs and ensure appropriate use.
• Formulary Tier — A category within an insurance formulary that determines how much a patient pays out of pocket for a drug — lower tiers mean lower costs.