Employer Health Plans and Generic Preferences: How Formularies Shape 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 most employees never see: your employer’s formulary. It’s a list of approved medications your health plan covers, and it’s designed to steer you toward cheaper options, mostly generics. But understanding how it works can save you hundreds-or even thousands-of dollars a year.

How Formularies Work: The Tiered System

Most employer health plans use a tiered system to manage drug costs. Think of it like a pricing ladder. The bottom rung is for generic drugs, which cost the least. The higher you go, the more you pay out of pocket.

Tier 1: Generics. These are chemically identical to brand-name drugs but cost 80-85% less. Most plans charge $10 or less for a 30-day supply. The FDA confirms they’re just as safe and effective.

Tier 2: Preferred brand-name drugs. These are brand-name medications your plan has negotiated a deal on. You might pay $40.

Tier 3: Non-preferred brand-name drugs. If a generic exists but you choose the brand, you pay more-often $75 or higher.

Tier 4: Specialty drugs. These are for complex conditions like cancer, MS, or rheumatoid arthritis. Costs can run into hundreds or thousands per month. Coinsurance (a percentage of the price) is common here, not a flat copay.

The system isn’t random. Pharmacy Benefit Managers (PBMs) like OptumRx, CVS Caremark, and Express Scripts-companies hired by your employer to manage drug benefits-decide which drugs go where. They do this to push you toward cheaper options. And it works. In 2023, generics saved the U.S. healthcare system over $150 billion annually.

Why Your Plan Pushes Generics (And Why It Matters)

Your employer doesn’t just prefer generics because they’re cheap-they’re required to be. Insurance plans are structured to control rising drug costs. When a brand-name drug loses its patent, a generic version becomes available. At that point, PBMs automatically move the brand drug to Tier 3 or 4 and put the generic in Tier 1.

For example, if you’ve been taking a brand-name blood pressure pill for years, and a generic becomes available, your next refill might suddenly cost $65 instead of $10. If you don’t switch, you’re paying the difference. Most people don’t realize this change happened until they get to the pharmacy.

The savings are real. According to the Schauer Group, generic drugs save $3 billion every week. That’s money that stays in your employer’s budget-and could mean lower premiums or better benefits down the line.

But here’s the catch: those savings don’t always reach you. PBMs get rebates from drugmakers to include certain drugs on their formularies. The average rebate is 55% of the drug’s list price, according to KPMG. But your copay doesn’t reflect that discount. You pay the same whether the PBM gets $5 or $50 back. So while the system saves money overall, you might not feel it at the register.

What Happens When Your Drug Gets Removed

In January 2024, each of the three largest PBMs removed over 600 drugs from their formularies. That’s more than 1,800 medications pulled in total. These aren’t random removals. They’re negotiation tactics. If a drugmaker won’t offer a big enough rebate, the PBM drops the drug entirely.

If your medication is removed, you’ll get a notice-sometimes after you’ve already filled your prescription. You have a few options:

• Switch to a generic or preferred brand on the formulary
• Ask your doctor for a medical exception
• Pay full price out of pocket
• Appeal the decision through your plan

Medical exceptions require documentation from your doctor proving the drug is medically necessary. For chronic conditions like diabetes, asthma, or heart disease, this is common. But it takes time-and paperwork.

How to Find Out What’s Covered

You can’t guess your coverage. You need to check. Here’s how:

• Visit your insurer’s website and search their drug list. Look for “formulary” or “drug list.”
• Review your Summary of Benefits and Coverage (SBC). It should list drug tiers and copays.
• Call your insurer directly. Ask: “Is [drug name] covered, and what tier is it on?”
• Ask your pharmacist. They often have real-time access to your plan’s formulary.

Don’t assume your drug is covered just because it was last year. Formularies change frequently. A drug you’ve been taking for five years could be moved to a higher tier-or removed-without warning.

What Employers Are Doing to Help

Forward-thinking employers are using tools to make this easier:

• Consumer Driven Health Plans (CDHPs): These combine high-deductible plans with health savings accounts (HSAs). They encourage employees to shop for the best prices, including generics.
• Formulary education: Some companies send emails, payroll inserts, or text reminders explaining why generics are safe and cost-effective.
• Care management programs: Programs like HealthOptions.org’s Chronic Illness Support Program assign care managers to help employees find affordable alternatives.
• Price Assure Programs: These automatically apply discounts when you fill prescriptions at in-network pharmacies.

These programs don’t just save money-they reduce stress. Many employees are willing to use generics but don’t trust them. Education helps.

What You Can Do Right Now

You don’t need to wait for your employer to act. Here’s your action plan:

1. Check your plan’s formulary. Do it now. Don’t wait for your next refill.
2. If you’re on a brand-name drug with a generic available, ask your doctor if switching is safe.
3. Use in-network pharmacies. Out-of-network fills often cost more-even for generics.
4. Ask your pharmacist: “Is there a cheaper alternative on my plan?”
5. If your drug was removed, request a medical exception. Don’t give up.
6. Sign up for alerts from your insurer. Many offer email or text notifications when formularies change.

The Bigger Picture: Who Really Benefits?

The system works well for employers and PBMs. Generics reduce costs, formulary exclusions give PBMs leverage in negotiations, and rebates pad their profits. But for employees? The benefits are mixed.

You save money if you switch to generics. You lose money if you don’t know your drug was moved to a higher tier. You’re stuck if your medication gets dropped and your doctor won’t approve an exception.

The real issue isn’t generics. It’s transparency. You should know exactly what your plan covers, why, and how much you’ll pay. Right now, that information is buried in fine print or scattered across websites.

The good news? You have power. You can ask questions. You can demand clarity. And you can choose the cheaper, equally effective option-if you know it exists.

Final Thought: Generics Aren’t a Compromise. They’re the Smart Choice.

There’s a myth that generics are “lesser” drugs. They’re not. The FDA requires them to meet the same standards as brand-name drugs. The only difference? Price.

If your plan pushes generics, it’s not trying to deny you care. It’s trying to make care affordable-for everyone. But you need to be part of the conversation. Know your formulary. Ask questions. Switch when you can. And if your drug disappears? Fight for it. You’re not just managing a prescription. You’re managing your health-and your money.