How do formularies work?

Most Americans are members of at least one of the nation’s estimated 7,500 health plans, whether it be a commercial plan or a government-regulated plan like Medicare or Medicaid. Each health plan utilizes a formulary, or a list that specifies which drugs are covered and whether utilization management restrictions are in effect for a particular drug.

Most formularies separate drugs into tiers—such as generics, preferred brands, non-preferred brands and specialty drugs—which are associated with different levels of cost-sharing for the patient. The amount of a patient’s co-pay is specific to each health plan, and often differs for each plan using the same formulary.

Pharma companies can learn which drugs are covered in each payer’s published formulary documentation, which explains the tiers, edits, and codes used by each formulary. This document or database lists each drug’s tier placement, as well as the presence or absence of utilization restrictions. Although every health plan has a different benefit structure, first-tier drugs are associated with the lowest copayment, and copayment amounts increase with each tier.

A new drug’s placement on a high tier can mean lower utilization and reduced revenue for its manufacturer. Physicians are reluctant to prescribe drugs that they believe might create a cost burden for their patients; if the patient can’t afford the co-pay, they may abandon treatment and fail to get better.

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