Your doctor writes a prescription, you take it to the pharmacy, and the pharmacist tells you it will cost $400 because it is not on your plan’s formulary. If you have never heard the term, you are not alone. A formulary is the list of prescription drugs your health insurance plan agrees to cover — and understanding how it works can save you hundreds or even thousands of dollars a year. For more on how healthcare costs add up, visit our healthcare costs guide.
How a Formulary Works
What is a formulary in practical terms? It is a curated list maintained by your insurance company or pharmacy benefit manager (PBM) that determines which medications are covered, how much you pay for each one, and whether you need prior authorization before the plan will pay. Every Medicare Part D plan, marketplace plan, and employer-sponsored plan maintains its own formulary.
Formularies are developed by a committee of pharmacists, physicians, and sometimes patient advocates known as a Pharmacy and Therapeutics (P&T) committee. This committee evaluates clinical evidence, FDA approvals, safety data, and cost-effectiveness to decide which drugs make the list. The CMS requires that Medicare Part D formularies cover at least two drugs in each therapeutic category.
Understanding Formulary Tiers
Most formularies organize drugs into tiers, with each tier carrying a different cost-sharing amount. While the exact structure varies by plan, a typical setup includes four to six tiers.
Tier 1: Preferred Generic Drugs
These are the least expensive options, typically costing $5 to $15 per prescription. Generic drugs contain the same active ingredient as their brand-name counterparts and are approved by the FDA as safe and effective equivalents.
Tier 2: Non-Preferred Generics or Preferred Brand-Name Drugs
Copays here usually range from $20 to $50. A brand-name drug might land on Tier 2 if no generic alternative exists or if the manufacturer has negotiated a favorable rebate with the PBM.
Tier 3: Non-Preferred Brand-Name Drugs
Expect to pay $50 to $100 or 30% to 40% coinsurance. These medications have alternatives on lower tiers that the plan considers clinically equivalent.
Tier 4: Specialty Drugs
Specialty medications — used for conditions like rheumatoid arthritis, multiple sclerosis, or cancer — can cost $200 to $500 or more per fill, even with insurance. Many plans apply coinsurance of 25% to 50% for specialty drugs. According to the American Pharmacists Association, specialty drugs represent less than 2% of all prescriptions but account for over 50% of total drug spending.
What Happens When Your Drug Is Not on the Formulary
If your medication is excluded from the formulary entirely, your plan will not cover it at all. You would pay the full retail price at the pharmacy. However, you have several options before accepting that cost.
First, ask your doctor about therapeutic alternatives that are on the formulary. A different medication in the same drug class may work just as well. Second, your doctor can submit a formulary exception request — a formal appeal arguing that the non-formulary drug is medically necessary for your situation. According to Medicare.gov, plans must respond to standard exception requests within 72 hours and expedited requests within 24 hours.
Third, check if the drug manufacturer offers a patient assistance program. Many pharmaceutical companies provide medications at reduced cost or even free for patients who meet income criteria.
Prior Authorization and Step Therapy
Even drugs on the formulary may come with restrictions. Two of the most common are prior authorization and step therapy.
Prior authorization (PA) requires your doctor to get approval from the insurance company before the plan will cover a specific drug. This process can take 24 to 72 hours and involves submitting clinical documentation explaining why the medication is needed. PA is especially common for expensive brand-name and specialty drugs.
Step therapy, sometimes called “fail first,” requires you to try less expensive medications before the plan will cover a more costly one. For example, your insurer might require you to try two generic blood pressure medications before approving a newer brand-name option. While step therapy saves money for the plan, it can delay effective treatment — a concern that has led more than 30 states to pass step therapy reform laws, according to the American Medical Association.
Formulary Changes: What to Watch For
Insurance companies can and do change their formularies throughout the year. A drug that was covered in January may be moved to a higher tier — or removed entirely — in July. Plans are required to notify affected members at least 30 days before removing a drug or adding new restrictions under most state and federal regulations.
This matters most during open enrollment. Before renewing your plan or choosing a new one, check the formulary to confirm that all your current medications are still covered and on the same tier. The difference between a Tier 1 and Tier 3 drug can amount to $500 or more annually in extra out-of-pocket costs.
Medicare Part D and Formulary Rules
Medicare Part D formularies are subject to stricter federal regulations than commercial plans. CMS requires that Part D plans cover at least two drugs in each therapeutic category and class, with broader requirements for six protected classes: anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals, and immunosuppressants. For these classes, plans must cover “all or substantially all” drugs.
Part D plans also follow a defined coverage structure that includes a deductible phase, an initial coverage phase, a coverage gap (the so-called “donut hole”), and catastrophic coverage. The Inflation Reduction Act of 2022 capped annual out-of-pocket drug costs for Medicare beneficiaries at $2,000 starting in 2025 and eliminated cost-sharing in the catastrophic phase. These changes significantly affect how formulary tier placement impacts total annual drug spending for Medicare enrollees.
How to Find Your Plan’s Formulary
Every insurer is required to make its formulary publicly available. You can usually find it by logging into your insurance account online and navigating to the prescription drug section. Medicare Part D formularies are searchable on Medicare.gov’s Plan Finder tool. Marketplace plans list their formularies on the plan details page at HealthCare.gov.
When reviewing a formulary, pay attention to more than just whether your drug is listed. Note the tier, any prior authorization requirements, quantity limits (how many pills per fill the plan will cover), and whether the plan requires you to use mail-order pharmacy for maintenance medications.
Frequently Asked Questions
Can my doctor override the formulary?
Your doctor can request a formulary exception by submitting clinical documentation to your insurance company. If approved, the plan covers the non-formulary drug, often at a higher tier cost-sharing level. Approval rates vary, but having thorough medical records supporting the request improves your chances.
Are all generic drugs on the formulary?
Not necessarily. While most plans cover a wide range of generics, some may exclude certain generic drugs if multiple alternatives exist in the same class. Always verify coverage before assuming a generic will be inexpensive.
Does the formulary apply to my deductible?
Yes. Before you have met your annual deductible, you may pay the full negotiated price for formulary drugs rather than just a copay. Once you meet the deductible, your tier-based copay or coinsurance kicks in. Some plans exempt Tier 1 generics from the deductible.
What is a closed formulary vs an open formulary?
A closed formulary only covers drugs explicitly listed — anything not on the list gets zero coverage. An open formulary covers all FDA-approved medications but charges significantly more for drugs not on the preferred list. Most employer and marketplace plans use a closed or semi-closed formulary structure.
Formulary Tips for Open Enrollment
The annual open enrollment period is the best time to align your drug coverage with your actual medication needs. Before selecting or renewing a plan, list every prescription you currently take, including dosage and frequency. Then check each medication against the formulary of any plan you are considering. Pay attention to tier placement, prior authorization requirements, and quantity limits. A plan with a $50 lower monthly premium might cost you $200 more per month if it places your maintenance medication on a higher tier. Tools like GoodRx and the Medicare Plan Finder can help you estimate annual drug costs under different plans.
The Bottom Line
Your plan’s formulary directly determines how much you spend on medications every month. Before filling any new prescription, check whether the drug is on your formulary and which tier it occupies. If it is not covered or sits on an expensive tier, talk to your doctor about alternatives, request an exception, or explore manufacturer assistance programs. Reviewing your formulary during open enrollment is equally important — a plan with lower premiums may cost you more overall if your medications are on higher tiers. The 15 minutes you spend reviewing the drug list can easily translate into hundreds of dollars in annual savings.