What Is a Formulary and How Does It Affect Your Drug Coverage?

Key Takeaways

A formulary is your health plan's approved drug list, organized into cost tiers numbered one through five.

Formulary tier placement determines your copay or coinsurance at the pharmacy, not the drug's retail price.

Most ACA-compliant plans use four or five tiers, with generic drugs in Tier 1 carrying the lowest cost-sharing.

A formulary exception lets you request coverage for a non-formulary drug when a formulary alternative is medically unsuitable.

What Is a Formulary?

A formulary is your health plan's approved drug list and its primary function is cost-structuring: tier placement assigns different cost-sharing levels to each covered drug, determining how much you pay at the pharmacy counter on every fill. A brand-name drug your doctor prescribes may appear on the formulary but sit in a higher tier with steep coinsurance. The formulary is not a simple yes-or-no coverage question. It is the mechanism that controls your out-of-pocket drug costs throughout the plan year.

Formularies vary by insurer and plan, meaning the same drug can sit in different tiers across two plans sold by the same company.
ACA-compliant plans must cover at least two drugs in each drug category to meet formulary standards, per CMS Essential Health Benefits guidance; confirm the specific citation in your plan's Summary of Benefits and Coverage.
Some formularies apply quantity limits, step therapy requirements or prior authorization as conditions for coverage, beyond tier placement alone.
Employer-sponsored plans and Marketplace plans maintain separate formularies, and Medicare Part D plans operate under a distinct six-tier formulary structure.
You can find your plan's formulary in the Summary of Benefits and Coverage or by requesting it directly from your insurer before enrolling.

The formulary is one of several cost-sharing features that shape what you actually spend under a plan, alongside the deductible, copay and coinsurance rules.

What Are Formulary Tiers and How Do They Affect What You Pay?

Formulary tier assignment is a cost-structuring mechanism: the higher the tier, the greater the member's cost-sharing per fill. Plans assign each covered drug to a numbered tier, and that tier determines the copay or coinsurance you owe at the pharmacy, not the drug's retail price. For ACA Marketplace individual plans, the 2026 individual maximum out-of-pocket cap is $10,600. This cap does not apply to Medicare or most employer-sponsored plans, which operate under separate federal limits. Because tier cost-sharing accumulates across every fill throughout the year, a drug placed in a higher tier can consume a material share of that cap before the plan covers 100%.

Tier	What It Typically Contains	Typical Cost-Sharing Structure
Tier 1	Generic drugs	Lowest copay (commonly ranges from $5 to $20 per fill based on CMS plan landscape data, depending on plan)
Tier 2	Preferred brand-name drugs	Moderate copay
Tier 3	Non-preferred brand-name drugs	Higher copay or coinsurance begins
Tier 4	Specialty drugs	Coinsurance that commonly ranges from 20% to 50% per fill, depending on the plan
Tier 5 (Medicare Part D and some commercial plans)	Select specialty and high-cost drugs	Highest cost-sharing tier

Confirm your drug's tier placement in your plan's Summary of Benefits and Coverage or on your insurer's drug lookup tool before enrolling or filling a prescription.

A drug moving from Tier 2 to Tier 3 can materially increase annual cost-sharing, and checking tier placement before selecting a plan is more financially relevant than comparing premiums alone. The shift typically means moving from a flat copay to coinsurance, which scales with the drug's negotiated price rather than a fixed dollar amount.

What Are the Formulary Types?

Three main formulary structures govern how plans manage drug coverage: open, closed and tiered with clinical management overlays. The single most decision-relevant distinction is that a closed formulary offers no coverage for non-formulary drugs without an approved exception, while an open formulary covers non-formulary drugs at a higher cost-sharing tier. Most ACA Marketplace plans use a tiered formulary structure that functions between these two extremes, combining broad drug access with cost-sharing incentives that steer members toward preferred drugs.

Open Formulary:

An open formulary covers both formulary and non-formulary drugs, though non-formulary drugs are placed in the highest cost-sharing tier. Members have access to a broader range of drugs without requiring an exception, but the cost difference between tiers can be substantial, particularly for specialty medications.

Closed Formulary:

A closed formulary covers only the drugs explicitly listed in the plan's approved drug list. Non-formulary drugs receive no coverage unless the member obtains an approved formulary exception. Closed formularies are more common in employer-sponsored plans and Medicare Advantage prescription drug plans than in ACA Marketplace plans.

Tiered Formulary With Clinical Management:

Most commercial plans use a tiered formulary that combines open and closed elements. Drugs are assigned to tiers with corresponding cost-sharing levels, but some drugs within the formulary carry additional clinical management conditions such as prior authorization, step therapy or quantity limits before the plan processes the claim.

How Does a Formulary Work When You Fill a Prescription?

The formulary activates at the point of dispensing through an electronic claims process. When you fill a prescription, the pharmacist submits the claim to your insurer, the plan's system matches the drug's NDC code to its assigned formulary tier and that tier determines the cost-sharing applied at checkout. On plans where the deductible applies to prescription drugs, tier cost-sharing only activates after the deductible is met. Until that threshold is crossed, you pay the drug's full negotiated price at the pharmacy.

Costs at a standard pharmacy visit break down by tier:

1
Your doctor sends a prescription for a brand-name drug to the pharmacy.
2
The pharmacist submits the claim electronically to your insurer.
3
The insurer's system identifies the drug's NDC code and matches it to its formulary tier.
4
If your deductible is already met, the insurer applies the tier's cost-sharing rule (such as a $45 Tier 3 copay).
5
You pay the tier cost-sharing amount at checkout. The insurer covers its negotiated share with the pharmacy.

DOES YOUR DEDUCTIBLE APPLY TO PRESCRIPTION DRUGS?

Not all plans apply the deductible to prescription drugs. Some plans cover Tier 1 generic drugs at the flat copay even before the deductible is met, while Bronze and HDHP plans typically require the full deductible to be satisfied before any formulary tier cost-sharing applies. Confirm the prescription drug deductible rule in the plan's Summary of Benefits and Coverage before enrolling.

Which Drugs Are Typically Excluded From a Formulary?

Formulary exclusions are not the same as high-tier placement: an excluded drug receives no coverage at all, regardless of tier structure, unless an exception is approved. CMS requires ACA-compliant plans to cover the 10 essential health benefits but does not mandate coverage of every drug within a therapeutic class, giving plans discretion to exclude drugs when a therapeutic equivalent is listed on the formulary.

Cosmetic and Lifestyle Drugs:

Drugs prescribed primarily for cosmetic purposes, such as hair loss treatments or weight-loss medications not meeting clinical criteria, are excluded from most commercial formularies. Some plans cover FDA-approved weight-loss drugs under specific clinical guidelines; confirm coverage criteria in the plan documents before assuming exclusion.

Over-the-Counter Equivalents:

When a prescription drug has a clinically equivalent over-the-counter version available, plans frequently exclude the prescription form from the formulary entirely. Members fill the OTC equivalent at their own cost, which does not count toward the plan deductible or MOOP on most plans.

Experimental and Investigational Drugs:

Drugs that have not received FDA approval or are being used outside an approved indication are excluded from formulary coverage on virtually all commercial and Medicare plans. Coverage may be available through a clinical trial benefit on ACA-compliant plans, subject to the plan's trial coverage criteria.

Brand-Name Drugs With Generic Equivalents:

Some plans exclude the brand-name version of a drug when an FDA-approved generic equivalent is available and placed on the formulary. Members who require the brand-name drug for documented clinical reasons can pursue a formulary exception supported by their prescribing physician.

Drugs Requiring Specialty Pharmacy Dispensing Only:

Certain high-cost biologics and specialty drugs are excluded from retail pharmacy formularies but covered exclusively through the plan's designated specialty pharmacy network. Members filling these drugs at a retail pharmacy may find the claim denied even if the drug is technically on the formulary.

Coverage exclusions apply to ACA-compliant plans. Short-term health plans and grandfathered plans are not subject to ACA formulary standards and may exclude broader drug categories.

How Do You Find Out if Your Drug Is on Your Plan's Formulary?

Three access paths let you verify your drug's formulary status before enrolling or filling a prescription: your insurer's online drug lookup tool, the printed formulary included in the Summary of Benefits and Coverage and HealthCare.gov for Marketplace plans, which allows drug searches by plan before you enroll.

WHAT HAPPENS WHEN A DRUG IS NOT ON THE FORMULARY?

A non-formulary drug is not automatically denied at the pharmacy. The insurer may process the claim at the plan's highest cost-sharing tier, or the drug may require an approved formulary exception before the plan contributes to the cost. Until an exception is granted or a formulary alternative is filled, the member typically pays the full retail price out of pocket.

What Is a Formulary Exception and How Do You Request One?

A formulary exception applies when a listed formulary drug in the same therapeutic class is contraindicated, has caused adverse effects, or has proven ineffective for a specific patient. The process requires documented clinical justification from the prescribing physician. A successful exception results in the non-formulary drug being covered at a formulary tier's cost-sharing rate rather than the full retail price.

1
Confirm the Drug Is Not on the Formulary
Use your insurer's online drug lookup tool or request a printed formulary copy to verify the drug's status. If the drug appears in a higher tier rather than being absent entirely, a tier exception rather than a formulary exception may be the applicable request type.
2
Ask Your Doctor for a Supporting Letter
Your prescribing physician must document why a formulary alternative is medically inappropriate, including any adverse reactions, contraindications or treatment failures with formulary drugs in the same class. Insurers require this clinical justification before beginning the review.
3
Submit the Exception Request to Your Insurer
Requests are typically submitted by the prescribing physician or the enrollee directly, depending on the insurer's process. Under ACA rules, urgent exception requests must receive a decision within 24 hours; standard requests require a decision within 72 hours.
4
Receive a Decision and Know Your Appeal Rights
If the exception is approved, the drug is covered at the insurer's designated formulary tier cost-sharing. If denied, you have the right to an internal appeal and, if that fails, an external review by an independent organization.

How Formulary Changes During the Plan Year Affect Your Coverage

Insurers may remove a drug from the formulary or move it to a higher tier during the plan year under specific conditions.

Under CMS rules applicable to ACA Marketplace plans, plans are generally required to provide 60 days' advance written notice before removing a drug from the formulary. But, the notice requirement for mid-year tier movements may vary depending on plan type and applicable state rules. Confirm the specific notice terms in your plan documents.
During any applicable notice period, the plan must continue to honor the prior cost-sharing, giving the member time to switch to a formulary alternative, request an exception or wait for the next enrollment window to change plans.
On receiving a formulary change notice, confirm whether a therapeutic equivalent is available in a lower tier, contact the prescribing physician about alternatives and consider whether the change warrants switching plans at the next open enrollment window.

How Do Formularies Differ Across Plan Types?

Formularies differ across plan types because pharmacy network scope and regulatory structure vary by plan design. HMO and EPO plans tend to have more restrictive formularies because their pharmacy networks are narrower, while PPO plans may extend limited out-of-network formulary coverage at a higher tier cost.

Medicare Part D formularies operate under a separate CMS-regulated six-tier structure distinct from commercial plan formularies, with tier definitions and cost-sharing rules set through federal guidance rather than insurer discretion.

ACA Marketplace Plans:

ACA Marketplace plans must cover at least two drugs per drug category under CMS formulary requirements, per CMS Essential Health Benefits guidance. Most use a four-tier structure, though some plans offer a fifth specialty tier. Tier 1 generic drug copays on Silver plans commonly range from $5 to $20 per fill based on CMS plan landscape data.

Employer-Sponsored Plans:

Employer plans maintain formularies negotiated between the insurer and a pharmacy benefit manager (PBM), and these are not standardized across employers. A drug your previous employer's plan covered at Tier 2 may sit in Tier 3 or be removed entirely under a new employer's plan, making formulary review an important step during open enrollment transitions.

HDHP Plans:

High-deductible health plans paired with an HSA apply the full plan deductible to most prescription drugs before formulary tier cost-sharing activates, with the exception of certain preventive drugs exempt by IRS guidance. Members should review their most frequently filled prescriptions against the HDHP formulary and deductible before enrolling.

Medicare Part D Plans:

Medicare Part D formularies follow a six-tier structure regulated by CMS. Tier 1 covers preferred generics, Tier 2 covers generics, Tier 3 covers preferred brands, Tier 4 covers non-preferred brands, Tier 5 covers specialty drugs, and Tier 6 insulin carries a $35 per-month cost-sharing cap under the Inflation Reduction Act.

Medicaid Plans:

Medicaid formularies are set at the state level within federal guidelines and can differ substantially from commercial plan formularies. States must cover drugs from manufacturers enrolled in the Medicaid Drug Rebate Program, but each state sets its own preferred drug list. Low-income enrollees on Medicaid may have different prior authorization requirements than commercial plan members filling the same drug.

What Your Formulary Tells You Before You Enroll

Your formulary controls what you pay at the pharmacy, not just whether a drug is covered. Checking your drug's tier before you enroll is the highest-value action you can take as a plan shopper. For ACA Marketplace individual plans, the 2026 individual maximum out-of-pocket cap is $10,600. This limit applies to ACA Marketplace individual plans and does not govern Medicare or employer-sponsored plan limits. Tier cost-sharing compounds across every fill. Comparing premiums alone is insufficient. The formulary determines your real annual drug cost.

Formulary in Health Insurance: FAQ

The following frequently asked questions cover edge cases and adjacent topics about formularies that plan shoppers commonly encounter:

What is the difference between a formulary and a drug list?

"Drug list" is the plain-language term many insurers use for their formulary. Both refer to the same document, but formularies include tier assignments, cost-sharing rules and clinical management conditions, not just an inclusion list. Confirm which tier your drug occupies, not just whether it appears.

Does a formulary apply to mail-order pharmacies differently?

The formulary tier structure applies at both retail and mail-order pharmacies. Many plans offer a lower per-fill cost for a 90-day supply through a designated mail-order pharmacy, but a Tier 3 drug remains Tier 3 regardless of dispensing channel.

How often can you request a formulary exception?

Formulary exceptions typically must be renewed each plan year because formularies reset at renewal. CMS requires ACA Marketplace plans to give advance written notice of formulary changes, giving members time to initiate a renewal request before prior approval lapses on a non-formulary drug. Confirm the specific notice period in your plan documents.

Does a formulary affect specialty drug coverage?

Specialty drugs occupy the highest formulary tier on most plans, with coinsurance that commonly ranges from 20% to 50% per fill, depending on the plan. Many plans also require prior authorization before processing a specialty drug claim. Confirm both the tier placement and any prior authorization requirement before selecting a plan.

Can formulary tier placement affect my HSA or FSA spending?

Tier placement directly determines how much an enrollee draws from an HSA or FSA account on prescriptions. On HDHP plans, the full drug cost applies toward the deductible before tier cost-sharing activates.

Is a formulary the same across all plans from the same insurer?

Formularies vary across plans within the same insurer's portfolio. A Gold plan and a Bronze plan from the same company can assign the same drug to different tiers. Always check the specific plan's formulary, not the insurer's general drug list.

About Mark Fitzpatrick

Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. He has analyzed the insurance market for over five years, conducting original research for insurance shoppers. His insights have been featured in CNBC, NBC News and Mashable.

Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!

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