The Food and Drug Administration (FDA) says that nearly 8 in 10 prescriptions1 filled in the United States are for generic drugs. Generic drugs are less expensive than brand-name medications, but that doesn’t mean they are inexpensive. Jay Harold gives reasons why generic drug prices are high in his post, “Generic Drug can be Expensive: 5 Reasons Costs are High.”
How are Drug Costs Managed by Insurance Companies?
Jay Harold wants you to know why we have the current system to determine patient drug costs. The Academy of Managed Care Pharmacy provides the rationale for the used of a drug formulary.
A drug formulary2 , or preferred drug list, is a continually updated list of medications and related products supported by current evidence-based medicine, judgment of physicians, pharmacists and other experts in the diagnosis and treatment of disease and preservation of health.
The primary purpose of the formulary is to encourage the use of safe, effective and most affordable medications. A formulary system is much more than a list of medications approved for use by a managed health care organization. A formulary system includes the methodology an organization uses to evaluate clinical and medical literature and the approach for selecting medications for different diseases, conditions, and patients. Policies and procedures for the procuring, dispensing, administering and appropriate utilization of medications are also included in the system. Formulary systems often contain additional prescribing guidelines and clinical information which assist health care professionals to promote high quality, affordable care for patients. Finally, for quality assurance purposes, managed health care systems that use formularies have policies in place to give physicians and patients access to non-formulary drugs where medically necessary.
How do a Drug Formulary influence Patient Drug Costs?
Trisha Torrey3 wrote an article about how insurance companies determine patient drug costs. One of the most important topics she talks about is a drug formulary’s tier pricing system. The tier pricing system often creates confusion inside the pharmacy for both patients and pharmacists. Her overview of the tier pricing system used by U.S. insurance companies to arrive at your out of pocket cost helps explain this complex and confusing system. Here’s her take:
If you have prescription coverage for the drugs your doctor prescribes, you’ll want to become familiar with your insurance company, Medicare or payer’s drug pricing system, called a formulary.
A drug’s position in the formulary’s tier pricing system will make a big difference in your overall drug expenses.
What is a Formulary?
Your payer, whether it is a private insurance company, Medicare, Tricare, Medicaid or another program maintains a list of drugs it will pay for called its formulary.
Its formulary is comprised of generic drugs, prescription drugs and sometimes over-the-counter drugs (OTC) that were previously prescription-only drugs. For example, Prilosec and Naproxen used to be prescription only, but both are now OTC drugs. Some payer plans include Prilosec and Naproxen in their formularies.
What Are Formulary Tiers?
Tiers are groups of drugs that fall within description and pricing groups:
Tier 1 or Tier I: Tier 1 drugs are usually limited to generic drugs, the lowest cost drugs. Sometimes other, regularly lower price branded drugs will fall into this tier, too. Tier I drugs cost us the lowest co-pays, usually $10 to $25.
Tier 2 or Tier II: Tier II is usually comprised of brand name drugs or more expensive generics. If you must take a brand name drug, your payer will have a list of branded drugs it prefers (because their cost is less, explained below.) These preferred brands are found in Tier 2. Tier II drugs cost us a middle-value co-pay, usually $15 to $50.
Tier 3: or Tier III: The more expensive brand name drugs, and usually the ones your insurance company doesn’t want you to get a prescription for (because their cost is higher, explained below) are also considered non-preferred. They are found in Tier 3. Tier III drugs will cost us even more than the lower tiers, usually $25 to $75 co-pay.
Tier 4 or Tier IV, also called specialty drugs: These are usually newly approved pharmaceutical drugs and are so expensive that your payer wants to discourage prescriptions for the drug. Tier IV is a newer designation, first used in 2009.
A Tier IV designation seems to be a catch-all for expensive drugs. Rather than assign a specific dollar co-pay, payers will assign a percentage, like 60%. For example, a very expensive chemo drug, priced at $1,000 may cost the patient $600.
Why Are Drugs Listed in Tiers?
This is a one-word answer to that question: money.
A drug’s tier listing is a function of two things: its real cost and the payer’s negotiated cost. The more the drug costs the payer, the higher the tier, and the more it will cost patients.
How Can I Find My Health Insurer’s Formulary?
Any healthcare payer will make its formulary available to you — they want you to have it and use it. It will be readily available on its website, or you can call the customer service number and ask them to mail it to you.
It’s not unusual for a payer to make changes to its formulary or to move a drug from one tier to another. If you take a drug on a daily or regular basis, you may be notified when a shift takes place. Also, you’ll want to double-check each year during open enrollment, when you have the opportunity to make changes to your coverage plan, to see if your drug has shifted its position in the payer’s formulary.
How to lower your Price for Generic Drugs?
It takes some effort on your part to reduce out of pocket drug costs. For example, if your doctor prescribes a steroid cream for a rash and it falls in Tier 3 of the formulary, ask for am alternate medication. This will open up a conversation why you need this particular drug, or a suitable alternative drug will be given.
Knowing the position of your medications in your payer’s formulary is the key to getting the drug you need for the least amount of money.
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