AARP

OCTOBER 2023

PUBLIC POLICY INSTITUTE

Fact Sheet

Medication Literacy Series: Drug

Formularies

James McSpadden
AARP Public Policy Institute

A key benefit of health insurance is access to prescription drugs.
A health plan's prescription drug formulary manages that access.
At its core, a formulary is a list of prescription drugs covered by
a plan. The list contains all the brand and generic drugs that a
consumer would have access to as a plan enrollee.

In practice, a formulary is a complex, multilayered tool that
manages the safe and appropriate use of prescription drugs as
well as the interests of a variety of stakeholders. For insurers,
the formulary is a way to compete with other health plans and
limit overall drug spending; for prescribers, the formulary
can influence prescribing decisions; and for consumers, the
formulary determines whether and how they access and

what they pay out of pocket for prescription drugs needed to
maintain health.

Despite the central role of formularies in drug access, many
older adults have a limited understanding of their health plan's
drug formulary and how its design can affect their ability to get
their prescription drugs. This Fact Sheet highlights the essential
components of drug formularies and considers the challenges
that older adults, particularly those with low medication
literacy, face when responding to the impacts and implications
of formularies annually and throughout the plan year.

Formulary basics

Formulary development typically begins with a Pharmacy
and Therapeutic (P&T) Committee. This body, which consists
of a broad range of health care professionals appointed

by an insurer, evaluates the clinical evidence and makes
recommendations about which drugs to cover as well

as whether to apply restrictions, known as utilization
management, to covered drugs. Insurers use the P&T
Committee recommendations along with feedback from their
pharmacy benefit manager, which negotiates rebates and prices
with drug manufacturers, to design a formulary that manages
a plan's prescription drug benefit. A P&T Committee may also
make recommendations during the year that result in changes
to a plan's formulary.

Key Takeaways

e Insurers develop and use
drug formularies to help
manage prescription drug
utilization and spending.

e Aformulary's design
dictates if and how patients
can access prescribed drugs
and how much the out-of-
pocket cost for a drug will
be, and involves multiple
components (covered drugs,
restrictions for access, tiers
or levels of coverage, and
cost sharing).

e When the formulary acts as
a barrier, older adults must
invest time and effort to
access their prescribed drug.

e This complexity may
contribute to the high
share of people with
health coverage who do
not compare their plan
options each year during
open enrollment and the
small number of people
who appeal an insurer's
coverage decision.

e Older adults with limited
medication literacy may
encounter additional
barriers when trying to
choose a formulary and/or
navigate their formulary to
access needed drugs.
Drug Formulary Terms

Cost sharing:

A consumer's out-of-pocket obligation for drugs on a specific formulary

tier. Typically, the lowest tier has minimal cost sharing, in the form of a
fixed payment (copay), and the highest tier requires cost sharing that is a
percentage (coinsurance) of the drug's price.

Covered drugs:
formulary.*

The generic, brand-name, and specialty drugs a plan includes in its

Prior authorization: A requirement that a provider or consumer seek approval from an insurer
before a pharmacy can dispense a medication.

Quantity limits:

A restriction on the amount of a medication available to a consumerin a

certain time period (usually 30 days).

Y RG] 'A

A requirement that a consumer try other, less expensive medications that

treat a given condition before filling a higher-priced medication.

Therapeutic class:

A grouping of similar drugs based on their characteristics and how they are

used to treat a disease. Formularies may cover multiple drugs in the same
therapeutic class across tiers.

Tiers:

Levels or groupings of covered drugs within a formulary. Most formularies

have two to seven tiers broken out by a drug's preferred status and type
(generic, brand-name, and specialty drugs).

Utilization
management:

The range of tools that plans use to manage consumer access to certain,
often high-priced, drugs. The three most common forms of utilization

management are prior authorization, quantity limits, and step therapy.

* "Specialty drug"is a broad term that generally includes drugs that are very expensive and are used to treat complex and
chronic conditions, that require special administration and handling, or that require patient care management. See Leigh Purvis
and Stephen W. Schondelmeyer, Rx Price Watch Report: Trends in Retail Prices of Brand Name Prescription Drugs Widely Used
by Older Americans, 2006 to 2020. (Washington, DC: AARP Public Policy Institute, September 2021), https.//doi.org/10.26419/
Jo)oIROI0IOYACRO10IK

Drug formulary design can vary significantly
from plan to plan as insurers employ the
four components common to all formularies:
covered drugs, utilization management, tiers,
and cost sharing.

Covered drugs

Insurers ultimately determine which of the
thousands of FDA-approved drugs to include
in a plan's formulary. Insurers have some
flexibility in developing a plan's covered
drug list; however, plans must also adhere to

 

certain state and federal laws. For example,
the Centers for Medicare & Medicaid Services
(CMS) requires Medicare Part D plans that
provide outpatient prescription coverage to
cover at least two drugs in every therapeutic
class and all or substantially all drugs in six
protected classes.!

Insurers may also elect to exclude, or not
cover, drugs based on the recommendations
of the plan's P&T Committee or pharmacy
benefit manager. Exclusions may include drugs
OCTOBER 2023

that an insurer considers low value (e.g., a
brand that has multiple generic equivalents).?
As competition in the drug market and the
number of approved high-priced drugs have
increased, the number of drugs excluded from
many plan formularies has increased? and, in
some cases, insurers have been slow to cover
newly approved drugs.*

Utilization management

Insurers can apply one or more utilization
management (UM) tools-typically prior
authorization, step therapy, and/or quantity
limits-to covered drugs in a plan's formulary.
When a health provider prescribes a drug with
UM, a plan enrollee often must work with this
provider to ensure that the conditions are met
before the plan will cover the prescribed drug.

UM has become increasingly common as a
means to limit insurer spending, particularly
for high-priced drugs. In 2022, about one in
two drugs covered by Part D plans were subject
to some type of utilization management.>
Similarly, in 2020, the top health insurance
plans sold on the individual marketplace in
each state applied UM to 85 percent of brand-
name cancer drugs and more than 60 percent
of brand-name drugs for three other
therapeutic classes (diabetes, antipsychotics,
and chronic obstructive pulmonary disease).®

Tiers

Generally, each formulary tier represents a
certain drug type. A four-tier formulary, for
example, would place generics on the lowest
tier, brand-name drugs on the two middle
tiers (preferred and nonpreferred brand-name
drugs), and specialty drugs on the top tier.
However, plans can include different drug
types within the same tier. This can result in
a brand-name drug and its generic equivalent
being on the same tier or, rarely, brand-name
drugs receiving preferred tier placement over
their generic equivalents.'

Insurers have flexibility in setting the number
of tiers on a given formulary. This flexibility
is most apparent in private insurance plans.
A 2018 study of marketplace plans in Florida

and Illinois showed that 35 percent and

73 percent of plans, respectively, had seven
formulary tiers and other plans in each state
had four, five, and six tiers.® A 2022 survey
showed that more than half (55 percent) of
employer-sponsored plans had four or more
tiers and nearly a third (35 percent) had two or
three tiers.® Meanwhile, 95 percent of stand-
alone Medicare Part D (PDP) and 81 percent

of Medicare Advantage with drug coverage
(MA-PD) plan formularies are currently
composed of five tiers-preferred generics,
generics, preferred brand, nonpreferred brand,
and specialty drugs.!®

Cost sharing

Where an insurer places drugs on a formulary
determines what a consumer's cost sharing
will be. Formularies associate a specific cost-
sharing value with each tier in the form of a
fixed copay or coinsurance based on the price
of the drug. As such, an older adult's overall
out-of-pocket prescription drug spending often
reflects the tiers in which their drugs appear in
a plan's formulary.

Cost sharing escalates across formulary tiers.
Out-of-pockets costs are low for drugs on

the lowest tier, typically preferred generics,
and highest for drugs on the highest tier,
typically specialty drugs. Yet, the cost-sharing
amounts and the form of cost sharing (copay
or coinsurance) for each tier can vary by plan.
For example, 85 percent of individuals with
employer-sponsored insurance were in plans
with three or more tiers in 2021. Among plans
with three or more tiers, over two-thirds
required copays for tier 1 (83 percent), tier 2
(73 percent), and tier 3 (70 percent). More than
half (51 percent) required coinsurance for tier 4
drugs, and the levels of cost sharing of drugs at
each tier varied across the plans.!

Similar variation shows up in Medicare Part D
plans, despite CMS cost-sharing limits.!
Enrollees in both PDPs and MA-PDs could

see different cost sharing for the same tier of
drugs, depending on their plan's formulary. For
example, Medicare enrollees with PDPs could
have a copay for a preferred brand-name drug
OCTOBER 2023

up to $47 or coinsurance up to 25 percent. Also,
Medicare enrollees with a MA-PD could have a
copay for nonpreferred brand-name drugs up to
$100 or coinsurance up to 50 percent.?

Annual opportunities to review plan
formularies

During open enrollment-or other designated
periods identified by a health plan-many
people with health coverage have an
opportunity to review drug formularies as
part of their coverage options for the coming
year. Each year older adults can evaluate the
elements of their plan's formulary, examine a
range of other insurance options, and select a
plan with a formulary that meets their needs.
People with Medicare can plug their current

FIGURE 1

drugs into Medicare Plan Finder and find
tailored information about drug coverage,

UM restrictions, and anticipated cost sharing.
However, similar comparison tools may not be
available for other forms of coverage, making
it more difficult for people to evaluate their
options.

The number of available plans makes this

task difficult. Many people must sort through
a multitude of plans (each with its own
formulary). While choices for older adults with
employer-sponsored or retiree health coverage
may be relatively limited, the number of plan
choices for many older adults with other
insurance coverage can be considerably higher
(figure 1).* In 2022, insurers offered more than
15,500 marketplace plans,' and nearly two-

Average Number of Available Individual Market and Medicare Part D Plans, by Year

M Medicare PDP
M Medicare Advantage with Drug Coverage
Marketplace Plans

39

27 26 28
- 24

2019 2020

2021

114
107

61

35

30 31

23 24

2022 2023

Sources: Medicare PDP and MA-PD data from the Kaiser Family Foundation's analysis of 2022 Part D plan files. Marketplace data from
the CMS Center for Consumer Information and Insurance Oversight's 2023 Quality Health Plan Choice and Premium Report. ("Plan Year
2023 Qualified Health Plan Choice and Premiums in HealthCare.gov Marketplaces," Center for Consumer Information and Insurance
Oversight, October 2022, https://www.cms.gov/cciio/resources/data-resources/downloads/2023ghppremiumschoicereport.pdf).

Note: Figure 1 does not include the number of employer-sponsored insurance plans, since different-sized employers have different
approaches to plan offerings. Employers may offer a different set of plans to different employees, have limited choices, or offer
only one plan. (2022 Employer Health Benefits Survey," Kaiser Family Foundation, October 2022, https.//www.kff.org/health-costs,

report/2022-emplover-health-benefits-survey/)
OCTOBER 2023

thirds (61 percent) of adults ages 50 to 64 could
choose marketplace plans from more than five
insurers.' Also in 2022, the average Medicare
beneficiary had to choose from nearly

60 Part D plans." Notably, most coverage

is comprehensive and requires potential
beneficiaries to sort through other coverage
data along with the plan's drug formulary.®

Research has shown that an increased number
of plan offerings may drive competition and
lower plan premiums.! Yet an increased
number of plan offerings may also paralyze
consumers from making a choice at all and
prevent older adults from considering their
prescription drug coverage.? The 2020
Medicare Current Beneficiary Survey showed
that most Medicare beneficiaries with Part D
coverage did not compare their plan's drug
coverage with other available plans.? Rates of
comparison were even lower among Black and
Hispanic enrollees. A survey of marketplace
enrollees showed only slightly higher attention
to formularies, with less than one-quarter

(24 percent) of adults considering drug
coverage when selecting a plan.??

Another complicating factor is that drug
formularies can change during the year. These
changes can be positive, such as lowering cost
sharing or adding a new drug to the formulary,
or negative, such as removing a drug from

the formulary or adding new utilization
management, although the latter is more likely
to be subject to restrictions. For example,

CMS requires Part D plans to obtain approval
prior to making certain negative formulary
changes and requires them to exempt affected
beneficiaries for the rest of the plan year.? In
addition, several states have recently limited
private plans' ability to make negative midyear
formulary changes.?

Day-to-day interactions with formularies

Most people, whether they realize it or not,
interact with their formulary throughout

the plan year. Each time an individual fills a
prescription, their formulary is in action. More
often than not, the formulary action remains

in the background; the insurer processes the
prescription request, and the patient pays

the required cost sharing for the prescription
based on its tier in the formulary. However,
when the formulary requires utilization
management like prior authorization, an
individual may need to invest time, effort, and
skill to navigate the formulary and access the
necessary drug.

Faced with a formulary-related obstacle, older
adults have a choice. They can work with their
provider to find an alternative therapy covered
by the formulary, remediate the cause of the
denial, or request an exception from the plan.
Many resolve the issue with their provider's
help. Yet, in what might reflect the needed
investment by an individual, only a small
number make an appeal when the plan does
not approve an exception for the drug with
restrictions. Less than 1 percent of marketplace
enrollees denied a health claim, including a
prescription drug fill, appealed the denial.?®
The appeal rate for prescription drug denials
among Medicare Part D enrollees was higher
but still less than 10 percent in 2017.26 Notably,
Medicare Part D enrollees have appealed a
denial at increasing rates in recent years, likely
due in part to the increased use of utilization
management.?"

Another formulary-related access barrier is
cost sharing. Among older adults who did not
fill a prescription, cost was most often the
reason.? This is unsurprising, because as more
high-priced drugs have entered the market,
insurers have shifted some of those costs

to consumers through increased copays or
coinsurance.?

While formularies are designed to help guide
appropriate utilization, they can be disruptive
for patients. Regardless of the means of
resolution, a rejected claim due to formulary
constraints can cause a delay in getting the
medication as the prescriber communicates
with the pharmacy and the plan to cover the
drug as part of an individual's treatment. In
some cases, older adults may abandon the
medication altogether.3°
OCTOBER 2023

Medication literacy and drug formularies

Low medication literacy-a subset of health
literacy defined by a limited ability to obtain
information about medication, process it,
and use the information to make medication
decisions-may further complicate an older
adult's experience with their drug formulary.
It may also make it more difficult for them to
identify a health plan with a formulary that
meets their medication needs.

As noted earlier, research shows that many
older adults do not compare health plans
and may be overwhelmed by the number of
available plans and associated formularies.
Effectively comparing formularies may prove
additionally challenging for older adults

with limited medication literacy. A study
that examined the relationship between low
health literacy and plan choice showed that
as the number of plan options increased,
older adults with a low capacity to understand
mathematical concepts reported greater
difficulty selecting a Part D plan.*

Also, older adults with low medication
literacy may have difficulty resolving
rejected prescriptions or accepting provider-
identified alternatives. When individuals
face formulary restrictions, they may need
to navigate a multistep appeals process;
sequence instructions across the process;
and communicate with the prescribing
provider, a pharmacist, and/or a health plan
representative. Resolving denials and making
appeals are time consuming, stressful, and

difficult for all individuals, but even more
difficult for older adults with low medication
literacy.3?

Conclusion

Health plans use formularies to help manage
prescription drug utilization and spending.
However, older adults may find it difficult to
compare and navigate their drug coverage.
These obstacles could cause them to face
unnecessarily high costs or stay in health
plans that do not meet their needs; and
create challenges for all but are particularly
problematic for older adults with low
medication literacy.

Addressing these challenges will help improve
older adults' access to the drugs they need.
Medicare Part D plans and other insurers

that enroll older adults should create well-
designed formularies that focus on appropriate
utilization and enhance the quality of
prescription drug therapy. Regulators should
also continue to provide strong oversight

of formulary design and help ensure that
health plans are meaningfully different from
one another and that such differences are
transparent and clear to potential enrollees.
And all parts of the health care system should
work to help older adults understand what

a formulary is and its implications for them.
Knowing which drugs a plan covers, the types
of restrictions in place, and associated cost
sharing can help ensure continuity of care and
better inform provider and patient decision
making.

 

1 Thesixclasses are antidepressants, antipsychotics, anticonvulsants, immunosuppressants for treatment of transplant rejection,
antiretrovirals, and antineoplastics. See "How Medicare Plans Use Pharmaues, Formularles, & Common Coverage Rules," Centers

for Medicare & Medicaid Services, August 2022, https:
Rules.pdf.

 

2 Adam Fein, "Five Takeaways from the Big Three PBMs' 2022 Formulary Exclusions," Drug Channels (blog),

h //lwww.drugchann 2022/01 ffive-takeaw

3 |bid.

-from-big-three-

ms-2022.html.

4 Huseyin Naci et al., "Coverage of New Drugs in Medicare Part D," The Milbank Quarterly, 100 (2022): 562-88,

h ; i.org/10.1111/1468- 12

5 "Section 10: Prescription Drugs," MedPAC Data Book, July 2022, https://www.medpac.gov/wp-content/uploads/2022/07/July2022

MedPAC_DataBook_Secl0 v2_SEC.pdf.
OCTOBER 2023

6 James McSpadden, Trends in Utilization Management of Prescription Drugs in Top Marketplace Plans. (Washington, DC: AARP Public
Policy Institute, April 6, 2022), https://doi.org/10.26419/ppi.00161.001.

7 Stacie B. Dusetzina et al., "Medicare Part D Plans Rarely Cover Brand-Name Drugs When Generics Are Available," Health Affairs 39,

no. 8 (2020): 1326-33, https://doi.org/10.1377/hlthaff.2019.01694.

8 1In 2018, Florida operated a federally-facilitated marketplace, and Illinois' marketplace operated under a state-federal partnership.
See Anna Hung and Griffin Sauvageau, "Formulary Tiers, Medication Cost Sharing, and Transparency in Bronze and Silver Qualified
Health Plans in 2014 vs 2018," Journal of Managed Care Specialty Pharmacy 27, no. 10 (2021):1332-40, https://www.jmcp.org/doi/

pdf/10.18553/jmcp.2021.27.10.1332.
9 "2022 Employer Health Benefits Survey," Kaiser Family Foundation, October 2022, https://www.kff.org/health-costs/report/2022-

m r-health-benefits-surv

10 Medicare Part D Generic Drug Tiering Request for Comment: Implications for Patient Out-of-Pocket Spending and Part D Plan Costs.
(Washington, DC: Avalere, February 2019), https://avalere.com/wp-content/uploads/2019/02/20190228-White-Paper-Part-D-
Generic-Tiering.pdf.

11 "2022 Employer Health Benefits Survey."

12 Memorandum from Amy Larrick Chavez-Valdez, "Contract Year (CY) 2023 Final Part D Bidding Instructions," Centers for Medicare &

Medicaid Services, February 03, 2022, https://www.cms.gov/files/document/2023partdbiddinginstructions.pdf.

13 Juliette Cubanski and Anthony Damico, "Key Facts About Medicare Part D Enrollment and Costs in 2022," Kaiser Famlly Foundation,
August 17,2022, h : 2 3 .

 

14 In 2019, 20 percent of insured workers in all firms had a choice of more than two plans and 36 percent had no choice. See
Regina E. Herzlinger and Barak D. Richman, "Cutting the Gordian Knot of Employee Health Care Benefits and Costs: A Corporate

Model Built on Employee Choice," Health Affairs Forefront, June 15, 2021, https://www.healthaffairs.org/do/10.1377/
forefront.20210609.624884/full/.

15 Katherlne Hempstead "Marketplace Pulse: Participation in 2022," Robert Wood Johnson Foundation, January 18 2022,
lib h

 

otal%20number%200f,growth%200f%20about%2015%209ercen

16 Stephanle Carlton Mike Lee, and Arjun Prakash, "Insights Into the 2022 Ind|V|dual Health Insurance Market," McKlnsey & Company,
. health divid L

 

insurance- market

17 Juliette Cubanski and Anthony Damico, "Medicare Part D: A F|rst Look at Med|care Prescr|pt|on Drug Plansin 2022 Kaiser Family
Foundation, November 2, 2021, h : i je-t 2
drug-plans-in-2022/, and Meredith Freed, Anthony Dam|co, and Tricia Neuman, "Medlcare Advantage 2022 Spotllght First Look,"
Kaiser Family Foundation, November 2, 2021, https://www.kff.org/medicare/issue-brief/medicare-advantage-2022-spotlight-first-

look/.

18 Robert T. Braun et al., "Health Literacy and Plan Choice: Implications for Medicare Managed Care," Health Literacy Research and
Practice 2, no. 1 (2018): e40-54, https://doi.org/10.3928/24748307-20180201-01

 

 

19 John Holahan, Erik Wengle, and Claire O'Brien, Marketplace Competition and Premiums, 2019-2022 (Washington, DC: Urban

Institute, April 2022), https://www.urban.org/sites/default/files/2022-04/Marketplace%20Premiums%20and%20Competition%20
2019-22.pdf.

20 "The Evidence Is Clear: Too Many Health Insurance Choices Can Impair, Not Help, Consumer Decision Making," Consumers Union,

November 2012, https://advocacy.consumerreports.org/wp-content/uploads/2012/11/Too Much Choice Nov 2012.pdf.

21 Nancy Ochieng et al., "A Relatively Small Share of Medicare Beneficiaries Compared Plans during a Recent Open Enrollment

Per|od " Kaiser Family Foundatlon, November 1 2022, mmummmmmwm

neficiari

   

22 Joachim O. Hero et al., "Decision-Making Experiences of Consumers Choosing Individual-Market Health Insurance Plans," Health

Affairs 38, no. 3 (2019): 464-72, https://doi.org/10.1377/hlthaff.2018.05036.

23 "Medlcare Prescrlptlon Drug Benefit Manual " Centers for Medicare and Medicaid Services, January 15, 2016,

 

hapter 6.pdf.
OCTOBER 2023

24 "One of the Reasons | Chose My Health Plan Was Because My Prescription Drugs Are Covered. Can My Plan Make Changes to What
Is Covered Once I' ve Enrolled, and How Will | Know Ahead of Tlme7 " Georgetown University McCourt School of Publlc Pollcy, n.d.,,

 

26 Office of Inspector General, Some Medicare Part D Beneficiaries Face Avoidable Extra Steps That Can Delay or Prevent Access to
Prescribed Drugs. (Washington, DC: Office of Inspector General, US Department of Health and Human Services, September 2019),

27 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy. (Washington, DC: Medicare Payment
Advisory Commission, March 2019), https://www.m V/Wp- i
source/reports/marl9_medpac_chi4_sec.pdf.

28 AARP, Consumer Views on Prescription Drugs Survey. (Washington, DC: AARP Research, July 2021), https://www.aarp.or; nten
m/aarp/r rch/surv istics/health/2021/drug-prices- r-americans-concern i.10.26419-2Fr: 47 1.pdf.

coredownload.pdf.

29 Medicare Payment Advisory Commission, Report to the Congress.

30 "Medication Access Report," CoverMyMeds, 2020, https://www.covermymeds.com/main/medication-access-report/.

31 Stacey Wood et al., "Numeracy and Medicare Part D: The Importance of Choice and Literacy for Numbers in Optimizing Decision
Making for Medicare's Prescription Drug Program," Psychology and Aging 26, no. 2 (2011): 295-307, https://doi.org/10.1037/
a0022028.

32 James McSpadden, Medication Literacy Series: Medication Management. (Washington, DC: AARP Public Policy Institute, June 2023),
h : i,org/10,2641 i,001 1.

Fact Sheet 1664600, October 2023

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