A formulary is a health insurer’s list of approved prescription medications. It specifies which drugs are covered, how they’re categorised (by tier), and what the patient’s cost-sharing will be for each. Drugs on a lower tier cost the patient less; drugs on a higher tier — or not on the formulary at all — cost more or require special approval.
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Formularies come up when patients or providers are choosing medications. “Is this drug on formulary?” is a routine question in prescribing and pharmacy settings. If a prescribed drug isn’t on the patient’s formulary, the pharmacist may suggest a covered alternative, or the physician may need to file a prior authorisation.
Insurance companies and pharmacy benefit managers (PBMs) maintain and update formularies. Drug manufacturers negotiate with PBMs to get their products included, often by offering rebates. This negotiation process is a major driver of drug pricing in the US.
Tier structure
A typical formulary has 3–5 tiers. Tier 1 is usually generic drugs (lowest copay). Tier 2 is preferred brand-name drugs. Tier 3 is non-preferred brands. Higher tiers may include specialty drugs for complex conditions, with significantly higher costs. The tier a drug lands on directly affects what patients pay.
Source: CMS Medicare formulary guidance