A formulary is an insurance plan’s list of covered prescription drugs. “Off formulary” medications are typically not covered by the insurance plan.
A formulary also includes the assignment of each medication to a tier that governs cost-sharing (i.e. copayments, coinsurance) for the drug and any restrictions (e.g. quantity limits, prior authorization, step therapy) placed on the medication.
Typically, a drug formulary indicates several important features of the health plan’s drug coverage to enrollees. First, the formulary conveys that some medications are covered by the health plan and other medications are not covered. With respect to covered medications, out-of-pocket costs will vary inasmuch as the drugs are assigned to different tiers within the formulary, with each tier having different cost-sharing obligations. Additionally, the formulary also indicates any limitations that are placed on covered medications.
- Quantity limits define the maximum units of medication that are covered by the plan for a specific time period
- Prior authorization indicates that coverage of the drug must first be requested before it is approved by the insurance company (and the company may disapprove)
- Step therapy indicates that the insurance company would like another medication (or medications) to be explored first and proven unsatisfactory before the medication is approved.
A drug formulary on occasion may indicate that some drugs (e.g. tier 1 generic drugs) may not be subject to a deductible. In some health plans, there is a separate deductible (usually lower than the standard plan deductible) for covered medications. In other plans, covered drugs can be subject to the same deductible as other medical services.