Employer Health Plans and Generic Preferences: How Formularies Control Your Prescription Costs

When you pick up a prescription at the pharmacy, you might not think about why one drug costs $10 and another costs $75-even if they treat the same condition. The reason lies in something called a formulary, a hidden but powerful list that decides what your employer’s health plan will pay for, and how much you’ll pay out of pocket. For most people with employer-sponsored insurance, this system shapes their access to medicine every single month.

How Formularies Work: The Tiered System

Your employer’s health plan doesn’t just cover all drugs equally. Instead, it uses a tiered formulary to group medications into levels based on cost. The goal? Encourage the use of cheaper, equally effective generic drugs while managing overall spending.

Tier 1 is almost always reserved for generic medications. These are the same active ingredients as brand-name drugs, approved by the FDA as equally safe and effective. But because generic manufacturers don’t spend millions on advertising or repeat clinical trials, they cost 80-85% less. In most plans, you’ll pay just $10 for a 30-day supply of a Tier 1 generic.

Tier 2 usually includes brand-name drugs that the plan prefers-often because they’ve negotiated a better deal with the manufacturer. Your copay here might be $40.

Tier 3 is for brand-name drugs that aren’t preferred. These are typically older or more expensive options, and your out-of-pocket cost jumps to $75 or more.

Tier 4 is for specialty drugs-medications for complex conditions like cancer, rheumatoid arthritis, or multiple sclerosis. These can cost hundreds or even thousands of dollars per month. Copays here are often a percentage of the total cost, not a flat fee.

The system is designed to nudge you toward the cheapest option that still works. If a brand-name drug becomes available as a generic, the pharmacy benefit manager (PBM) automatically moves the brand version to Tier 4 and the generic to Tier 1. Suddenly, your $40 drug becomes a $75 drug. If you don’t switch, you pay more.

Who Controls the List? Pharmacy Benefit Managers (PBMs)

You might not know it, but three companies-OptumRx, CVS Caremark, and Express Scripts-control the formularies for the vast majority of employer health plans in the U.S. These are Pharmacy Benefit Managers, or PBMs. They don’t sell insurance. They don’t make drugs. But they decide which drugs get covered, at what price, and at what tier.

PBMs negotiate rebates with drug manufacturers. The higher the rebate, the more likely a drug gets placed on a lower tier. This is where things get complicated. A drug might have a list price of $500, but after rebates and discounts, the PBM pays only $225. That 55% gap between list price and net price is called the gross-to-net (GTN) spread.

Here’s the catch: those savings don’t always go to you. The PBM keeps a portion of the rebate. Your plan might save money, but your copay stays the same. In some cases, the PBM even excludes a drug from the formulary entirely if the manufacturer won’t offer a big enough rebate. That means even if your doctor prescribes it, your plan won’t cover it-and you’ll pay full price unless you get an exception.

In January 2024, each of these three PBMs removed more than 600 drugs from their formularies. That’s over 1,800 medications pulled at once. Many were brand-name drugs that didn’t offer high enough rebates. For employees taking those drugs, this wasn’t a minor change-it was a potential disruption to their treatment.

Why Generics Are the Default Choice

The FDA has been clear for decades: generic drugs are not cheaper because they’re lower quality. They contain the same active ingredients, work the same way, and go through the same strict approval process as brand-name drugs. The only difference? They’re made after the patent expires, so other companies can produce them without repeating expensive research.

For employers, the math is simple. Generic drugs save $3 billion every week. That’s more than $150 billion a year. That’s why 99% of large employer plans include prescription drug coverage-and why nearly all of them push generics first.

But many employees still hesitate. They worry generics won’t work as well. Or they’ve been told by a doctor, “This brand is better.” Sometimes, that’s true-for a small number of drugs where bioequivalence is harder to guarantee. But for the vast majority, it’s not.

Employers who want to reduce costs and improve outcomes are starting to educate employees. They send emails. They include info in pay stubs. They use HR portals to explain why switching to a generic isn’t a compromise-it’s a smart choice.

If you’re on a chronic medication-like for high blood pressure, diabetes, or asthma-you’re likely on a generic already. You just didn’t notice the switch.

What Happens When Your Drug Gets Removed?

One of the biggest frustrations people face is when a drug they’ve been taking for years suddenly isn’t covered anymore. It’s not always because it’s unsafe. Often, it’s because the manufacturer refused to give the PBM a big enough discount.

If your drug gets pulled from the formulary, you have options:

• Ask your doctor for a generic alternative
• Request a medical exception from your insurer
• Switch to a different drug on the formulary
• Pay out of pocket

A medical exception means you or your doctor submits documentation showing why the excluded drug is medically necessary. This isn’t guaranteed, but it often works if you have a history of failed trials with other medications. Some employers even have care managers who help you navigate this process.

Don’t wait until your prescription runs out. If you see a notice from your insurer about formulary changes, act fast. Changes can happen with no advance warning.

How to Find Out What’s Covered

You can’t rely on your doctor or pharmacist to know every detail of your plan’s formulary. They might not even know which PBM your employer uses.

Here’s how to get accurate, up-to-date info:

1. Log in to your insurer’s website. Look for a “Drug List” or “Formulary” tool. Enter the name of your medication.
2. Check your Summary of Benefits and Coverage (SBC). It should list typical copays for each tier.
3. Call your insurer’s pharmacy line. Ask: “Is this drug on formulary? What tier is it? What’s my copay?”
4. Ask if your employer offers a Price Assure Program or similar tool that automatically applies discounts for generics.

Many people don’t realize they can compare prices across pharmacies. A generic might cost $10 at CVS but $5 at Walmart. Some plans even offer mail-order options for 90-day supplies at lower rates.

What You Can Do to Save

You don’t have to be passive in this system. Here’s how to take control:

• Always ask: “Is there a generic version?”
• If your doctor says “this brand is better,” ask why. Request evidence.
• Use your plan’s mail-order pharmacy for maintenance meds. It’s often cheaper.
• Check if your plan has a drug discount card or savings program.
• If you’re on a high-cost drug, ask your employer if they offer a Chronic Illness Support Program. These programs can help reduce out-of-pocket costs.

Also, don’t assume your plan stays the same year to year. Formularies change constantly. What was covered last January might not be covered this January.

The Bigger Picture: Savings That Don’t Reach You

The system works-if you’re an employer trying to cut costs. Generic drugs save billions. PBMs profit from rebates. Drug manufacturers keep market share by paying those rebates.

But for you, the employee, the benefits aren’t always clear. You might pay the same $10 copay for a generic even as the drug’s real cost drops. The savings go to the PBM and your employer, not to you.

That’s why some experts are pushing for reform. They want transparency. They want rebates passed directly to consumers. They want formularies to be based on clinical need-not just rebate size.

Until then, your best tool is knowledge. Know your formulary. Know your tiers. Know your options.

The next time you pick up a prescription, don’t just pay and leave. Ask: Why is this the cost? Is there a cheaper option? And if the answer is yes-choose it. Your wallet-and your health-will thank you.