A formulary is a list of prescription drugs that your health insurance plan covers. Sometimes called a “drug list,” it determines which medications you can get at a lower cost and which ones you’ll pay more for, or won’t be covered at all. Every health plan maintains its own formulary, and the drugs included can vary significantly from one plan to another.
How Formularies Are Organized Into Tiers
Most formularies don’t simply list drugs as “covered” or “not covered.” Instead, they organize medications into tiers, where each tier carries a different cost for you at the pharmacy. A drug in a lower tier costs less out of pocket than one in a higher tier.
A typical formulary has four tiers:
- Tier 1 (lowest cost): Most generic drugs. These are the cheapest option and often cost just a small copay.
- Tier 2 (medium cost): Preferred brand-name drugs. Your plan has negotiated favorable pricing on these.
- Tier 3 (higher cost): Non-preferred brand-name drugs. These work similarly to Tier 2 drugs but cost you more because your plan hasn’t secured the same discounts.
- Specialty tier (highest cost): Very high-cost medications, often for complex conditions like cancer, rheumatoid arthritis, or multiple sclerosis.
The specific tiers and what falls into them vary by plan. Two insurance plans from the same company can place the same drug in different tiers, which is why checking your plan’s formulary before filling a prescription matters so much.
Who Decides Which Drugs Make the List
A group called a Pharmacy and Therapeutics (P&T) committee builds and maintains each formulary. These committees include physicians, pharmacists, and other specialists who evaluate drugs based on several factors: how strong the clinical evidence is, how many patients the drug would help, how serious the condition it treats is, whether it works better than alternatives already on the formulary, its safety profile, and its cost.
Patient preference also plays a role. The committee considers things like whether a drug comes in pill form versus injection, how often it needs to be taken, and how well patients tolerate it. A drug that’s slightly less effective but far easier to take consistently might earn a spot over a theoretically superior option that patients frequently abandon. The formulary is continuously updated as new drugs enter the market and new evidence emerges about existing ones.
Open, Closed, and Incentivized Formularies
Not all formularies work the same way. There are three broad types, and the kind your plan uses shapes how much flexibility you have.
An open formulary is the most permissive. It contains a wide range of drugs with few restrictions. Your plan may flag certain medications as “preferred,” but if your doctor prescribes something else, it’s still covered. The tradeoff is that open formularies do the least to control costs, so premiums or copays may be higher overall.
A closed formulary is more restrictive, typically covering somewhere between 300 and 1,000 drug forms. If your doctor prescribes something not on the list, it won’t be covered unless you get an exception. Pharmacists often need to contact the prescriber to switch to a formulary alternative. Closed formularies tend to promote more consistent, evidence-based prescribing and often secure better pricing from drug manufacturers.
An incentivized formulary sits in the middle. It encourages you to choose preferred drugs by making them cheaper, but it doesn’t block access to non-preferred ones entirely. You just pay more. This is the most common structure in commercial insurance. If you’ve ever noticed that one brand of a medication has a $20 copay while another costs $60, you’re experiencing an incentivized formulary at work.
Utilization Management: Extra Steps for Some Drugs
Even when a drug appears on your formulary, your plan may require extra steps before it covers the cost. These are called utilization management tools, and they come in three main forms.
Prior authorization requires your doctor to get preapproval from the insurance plan before prescribing certain medications. This is common for expensive drugs or ones with potential for misuse. Your doctor submits clinical information explaining why you need the drug, and the plan decides whether to approve it.
Step therapy means you have to try a lower-cost drug first before the plan will cover a more expensive one. For example, you might need to try a generic blood pressure medication and show it doesn’t work well enough before your plan pays for a newer brand-name option.
Quantity limits cap how much of a medication the plan will cover in a given time frame. This might mean your plan covers 30 pills per month for a migraine drug but won’t pay for 60, even if your doctor writes the prescription that way.
What Happens When Your Drug Isn’t Covered
If a medication you need isn’t on your plan’s formulary, or if it’s placed on a tier that makes it unaffordable, you can request an exception. You, your doctor, or someone acting on your behalf can file the request. Your doctor will need to submit a supporting statement explaining why the formulary alternatives won’t work for you, either because they’d be less effective or because they’d cause adverse effects.
For Medicare Part D plans, the insurer must respond within 72 hours for standard requests or 24 hours for urgent ones. The initial response can come by phone, but a written notice must follow within three days. If the plan denies your request, you can appeal the decision.
Plans can also make changes during the year, but there are protections in place. Under Medicare rules, if a plan removes a drug from its formulary or moves it to a more expensive tier, it must give you 60 days’ notice before the change takes effect. This gives you and your doctor time to either find an alternative or file an exception request.
Medicare Part D Formulary Rules
Medicare Part D plans have specific federal requirements that commercial plans don’t. All Part D formularies must cover a wide range of commonly used drugs, and they’re required to include most medications in certain protected classes, including drugs that treat cancer, HIV/AIDS, depression, seizures, psychosis, and organ transplant rejection. This prevents plans from skimping on coverage for people with serious conditions.
Starting in 2025, the Inflation Reduction Act introduced major changes to how Part D formularies affect your wallet. Out-of-pocket drug costs for Medicare enrollees are now capped at $2,000 per year, a limit that will rise annually with Part D cost growth. The old “coverage gap” (sometimes called the donut hole), where enrollees previously faced 25% of their drug costs after hitting a spending threshold, has been eliminated entirely. Enrollees can also spread their out-of-pocket costs across the year in monthly installments rather than facing large bills in the months when they fill expensive prescriptions.
How to Check Your Formulary
Your plan’s formulary is usually available on its website, often as a searchable database or downloadable PDF. If you have a Medicare plan, you can also use the Medicare Plan Finder tool at Medicare.gov to compare formularies across plans. When reviewing your formulary, pay attention to the tier your drugs fall on, whether any require prior authorization or step therapy, and whether quantity limits apply.
Formularies are especially important to check during open enrollment, when you’re choosing or switching plans. A plan with lower monthly premiums might place your medications on higher tiers, costing you more overall. The reverse is also true: a plan that looks expensive on paper might save you money if it covers your specific drugs at lower tiers. Comparing the total annual cost of your medications across plans, not just the monthly premium, gives you the clearest picture of what you’ll actually spend.