Insurance Formularies and Drug Substitution: How Coverage Rules Affect Your Medication Costs

Every time you fill a prescription, there’s a hidden system deciding whether your medication is covered, how much you pay, and even if you can get the exact drug your doctor prescribed. That system is your insurance formulary-and it’s more powerful than most people realize.

What Exactly Is an Insurance Formulary?

An insurance formulary is simply a list of prescription drugs your plan agrees to cover. It’s not just a catalog-it’s a decision-making tool that controls access, cost, and sometimes even which medication you can use. Every Medicare Part D plan and most private insurers use one. These lists are updated regularly, often without warning, and they determine everything from your copay to whether you need special approval to get a drug.

Formularies are divided into tiers, and each tier has a different price tag. Tier 1 usually includes generic drugs-often costing just $10 to $15 per prescription. Tier 2 has preferred brand-name drugs, maybe $40 to $50. Tier 3 is for non-preferred brands, where you could pay $70 to $100. And Tier 4? That’s for specialty drugs-like those for cancer, MS, or rheumatoid arthritis. For these, you might pay 33% of the full price, which can run into thousands of dollars a year.

The difference between tiers isn’t just about money. Moving from Tier 1 to Tier 4 can triple or even quadruple your out-of-pocket cost for the same medication. And if your drug isn’t on the formulary at all? You pay full retail price-unless you go through a long, confusing exception process.

How Formularies Control Access: Prior Auth, Step Therapy, and Quantity Limits

It’s not enough for a drug to be on the list. Insurers add extra rules to limit use and lower costs. Three big ones are:

• Prior Authorization: Your doctor has to prove to the insurer why you need this specific drug instead of a cheaper one. This can take days or weeks. Eighty-two percent of doctors say these delays happen regularly, and 34% say they’ve caused serious harm to patients.
• Step Therapy: You must try and fail on a cheaper drug first-even if your doctor says it won’t work for you. For example, you might need to try three generic painkillers before the insurer will cover your prescribed biologic.
• Quantity Limits: The pharmacy can only give you a 30-day supply, even if your doctor prescribed 90 days. You’ll have to call back, get prior auth, or pay extra to get more.

These rules aren’t random. They’re designed to push patients toward lower-cost options. But for people with complex conditions, they can delay treatment, cause side effects from ineffective drugs, or even lead to treatment abandonment.

Open vs. Closed vs. Partially Closed Formularies

Not all formularies are built the same. There are three main types:

• Closed formularies cover only the drugs on their approved list. About 65% of Medicare Part D plans use this model. If your drug isn’t on it, you pay full price unless you win an exception. These plans have the lowest premiums but the toughest access barriers.
• Open formularies cover nearly all medications. About 22% of Part D plans use this. They’re more flexible, but premiums are 12-15% higher. You pay more each month, but less when you fill prescriptions.
• Partially closed formularies are a middle ground. They exclude certain drugs based on cost or clinical guidelines-like high-priced biologics or drugs with safety concerns.

The trade-off is simple: lower monthly cost or more freedom to choose your meds. Most people don’t realize this choice exists until they’re hit with a surprise bill.

Therapeutic Substitution: When the Pharmacist Changes Your Prescription

Here’s something many patients don’t know: your pharmacist can legally swap your prescribed drug for another one-even without calling your doctor.

This is called therapeutic substitution. In 31 states, pharmacists can replace your brand-name drug with a different one in the same class if it’s cheaper and clinically similar. For example, if you’re on Humira, they might switch you to a biosimilar like Cyltezo. That’s fine if it works. But for people with autoimmune diseases, cancer, or neurological conditions, even small differences can cause flare-ups, side effects, or treatment failure.

A 2023 study found this happens in about 18% of prescriptions. And for 5-7% of patients with complex conditions, it causes real problems. You might not even know it happened until your symptoms get worse or your lab results change.

Some states require pharmacists to notify you or your doctor. Others don’t. Always ask: “Was this drug switched?” And if you’re on a sensitive medication, request a non-substitutable label on your prescription.

What Happens When Your Drug Gets Removed from the Formulary?

Formularies change-often without notice. A drug you’ve been taking for years might suddenly move from Tier 2 to Tier 4. Or disappear entirely.

One Reddit user shared how their Humira copay jumped from $45 to $1,200 a month after their plan changed tiers. They didn’t find out until they went to pick up their refill. That’s not rare. A 2023 CMS audit found 43% of formulary changes happen without direct patient notification.

When this happens, you have options:

1. Request a formulary exception. Your doctor submits paperwork explaining why you need the drug. Medicare approves 73.2% of these requests-but the process takes 7.2 business days on average. For urgent cases, you can ask for an expedited review, but approval drops to 38.5%.
2. Switch to another drug on the formulary. But if the alternative doesn’t work, you’re stuck.
3. Pay out of pocket. Some drugs cost $10,000 a year. Not an option for most.
4. Switch plans. That’s why annual enrollment matters.

Patients who don’t act quickly often skip doses, cut pills in half, or stop treatment entirely. GoodRx’s 2023 survey found 42% of people skipped doses due to cost, and 18% quit treatment altogether.

How to Protect Yourself: A Practical Checklist

You can’t control formularies-but you can control how you respond. Here’s what to do:

• Review your formulary every year. During open enrollment (October 15-December 7 for Medicare, November 1-January 15 for ACA plans), check every medication you take. Don’t assume it’s still covered.
• Use the insurer’s online tool. Most have a formulary lookup. Enter your drug name and see the tier, copay, and restrictions. GoodRx says spending 15-20 minutes here saves an average of $1,200 a year.
• Ask about substitution. Tell your pharmacist: “Is this a substitution? Can you give me the exact brand my doctor prescribed?”
• Know your state’s substitution laws. Thirty-one states allow pharmacist substitution. Check your state’s board of pharmacy website to see if you’re protected.
• Save your doctor’s note. If you’ve had prior auth approved, keep a copy. If your drug gets removed, you can use it to support an exception request.
• Compare plans. Use Medicare’s Plan Finder or Healthcare.gov’s tool. People who compare at least three plans save an average of $472 a year.

The Bigger Picture: Why Formularies Exist-and Who Benefits

Formularies aren’t evil. They were created to make healthcare affordable. Pharmacy Benefit Managers (PBMs)-like CVS Caremark and Express Scripts-negotiate rebates with drugmakers. In return, those companies put their drugs on preferred tiers. The rebates average 35-45% of the list price. That’s how insurers keep premiums down.

But the system is skewed. PBMs control 92% of commercial drug coverage. The top three manage 83% of all prescriptions. That means a handful of companies decide which drugs you can get and how much you pay.

New rules are trying to fix this. The Inflation Reduction Act capped insulin at $35 a month and will cap total out-of-pocket drug costs at $2,000 in 2025. CMS now requires real-time cost tools at the point of prescribing-so doctors can see your copay before writing the script.

Still, formularies remain a barrier for many. A 2022 study in Health Affairs found cancer patients often face “unacceptable barriers” to life-saving drugs because of tier restrictions. Specialty drugs with 33% coinsurance can cost $15,000 a year.

What’s Changing in 2025 and Beyond

The formulary system is evolving. Here’s what’s next:

• $2,000 annual cap on out-of-pocket drug costs for Medicare Part D, starting January 1, 2025.
• Simplified formulary summaries. By 2025, insurers must provide a 4-page version instead of 287-page documents.
• Digital formularies. UnitedHealthcare now covers digital therapeutics-apps prescribed for diabetes, PTSD, or chronic pain-as part of their formulary.
• Personalized formularies. By 2030, experts predict formularies will use genetic data to recommend drugs based on your biology, reducing side effects.

But the core challenge remains: balancing cost control with patient access. The system works well for generic drugs and common conditions. For complex, expensive treatments? It’s still broken for too many people.