In the context of insurance, a formulary is a list of medications covered by a health plan. In other words, the list indicates which medications are eligible for payments by the health plans. A formulary assigns each drug to a specific tier. Formularies often have four or more tiers, and each of these tiers represents a category of cost-sharing for the medications assigned to it. Typically lower tiers have less expensive out-of-pocket costs than is the case for higher tiers. For example, the least expensive generic drugs may all belong to the same tier (e.g. tier I) and each of them may have a modest out-of-pocket cost, such as a $15 copayment which is paid by the enrollee. The remainder of the drug cost not covered by the out-of-pocket amount is paid by the insurance company. A biologic, which is a medication made from a living organism, can be more costly to manufacture and, consequently, may be assigned to a higher drug tier with more expensive out-of-pocket obligations for the health plan enrollee. Drug tiers in a formulary may be named by a number, or they may be labeled according to the medications in the category such as “generics,” “preferred brand name drugs,” “biologics,” etc.
A formulary can be “open” or “closed.” Formularies in commercial health plans and government health plans are typically closed. A closed formulary has a defined set of medications for which the insurance plan will pay. Drugs outside a closed formulary are not covered by the insurance, leaving the patient responsible for 100 percent of the off-formulary drug cost. An open formulary, in theory, covers all drugs approved by the FDA and prescribed by the health plan’s in-network providers. In either open or closed formularies, covered drugs may still have restrictions such as a prior authorization requirement or a quantity limit.
Some insurance plans have requirements for what medications are included within a formulary. For example, Medicare Part D requires every formulary to have at least two chemically distinct medications within most FDA therapeutic categories. The choice of the drugs is up to the insurer, except for instances where only one drug exists in the class or there is a CMS requirement to cover more than two drugs within a specific class.
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