Formulary

Why it matters

Two members can fill prescriptions for the same condition and pay very different amounts. Often the reason isn't the drug's price at the counter. It's where the drug sits on the plan's formulary.

Most covered workers are in plans that sort drugs into tiers, with a different copay or coinsurance for each. In KFF's 2026 Employer Health Benefits Survey, 82% of covered workers with drug coverage were in a plan with three or more tiers, not counting tiers just for specialty drugs (KFF, October 2026). Counting specialty-only tiers, 63% were in a plan with four or more. The survey covers employers with 10 or more workers.

For workers who pay copays in plans with three or more tiers, KFF's 2026 averages were:

Not everyone pays a copay. Among workers in plans with three or more tiers, 71% had a copay for third-tier drugs and 28% had coinsurance; for the fourth tier, it was 51% and 45%. Average coinsurance ran 21%, 26%, 35% and 30% for tiers one through four (KFF tables). Tier names vary by plan; KFF describes the first three tiers as often called generic, preferred and non-preferred.

Worked example: same drug, different tier

All amounts are hypothetical. They use KFF's average tier 2 and tier 3 copays as if they were one plan's copays.

In this hypothetical plan, moving the same monthly prescription from tier two to tier three raises the copay from $36 to $66, $360 more over 12 fills. The drug is still covered; it just costs the member more.

The example assumes flat copays, 30-day fills and no deductible. Real plans can differ in ways that change the math:

• Deductibles. Some plans apply drugs, often brand drugs, to the deductible first. Members in a high-deductible health plan may pay the full negotiated price until they meet it.
• Coinsurance. With coinsurance, the member pays a percentage of the drug's cost, so a tier move can matter more for an expensive drug.
• Supply length. A 90-day or mail-order supply usually has its own cost sharing.
• Plan redesign. A higher copay from one year to the next can also come from the plan changing its copays, not from the drug changing tiers.

When a drug is left off the list

A higher tier is different from exclusion. An excluded drug isn't covered under that formulary at all, though an exception or appeal may still get it covered for a member.

The three largest PBMs each publish a standard formulary with an exclusion list. For 2026, each of the three largest PBMs' analyzed exclusion lists contained more than 600 products, counting multiple formulations of a drug as one product (Drug Channels Institute, January 2026). The same drug can appear on more than one list, so the counts can't simply be added.

Those are the PBMs' recommended national formularies, not every plan's list. Drug Channels describes them as suggestions rather than mandates: plan sponsors can adopt different formularies, though they may then face reduced rebates or higher plan costs, and a drug's exclusion doesn't mean every patient loses access. The lists also change each year. Express Scripts has already published its 2027 National Preferred Formulary exclusions (Express Scripts).

Read the transcript

Picture one member. Same drug. Last year, the copay was thirty-six dollars. This year, it's sixty-six. The drug didn't change. Its place on the formulary did.

A formulary is your plan's list of covered drugs, sorted into tiers. In KFF's 2026 survey of employers, most covered workers had three or more tiers. Among workers with copays, averages ran twelve dollars on the first tier, thirty-six on the second, sixty-six on the third, and one hundred thirty-six on the fourth.

In this hypothetical plan, that's thirty dollars more a fill, or three hundred sixty over twelve monthly fills. That drug is still covered. Some drugs are left off entirely. Each of the three biggest PBMs' 2026 exclusion lists names more than six hundred products. Your plan's formulary may be different.

So who decides the tier? Usually, a clinical committee reviews safety and effectiveness. But money can play a part. In its new PBM rule, the Department of Labor noted a commonly cited concern: PBMs may have an incentive to favor some high-list-price drugs because of the size of the rebates drugmakers pay.

Ask your broker: Which formulary does our plan use, and how often does it change? What happens when a member's drug isn't covered? And who keeps the rebates on our plan, and do they affect which drugs are preferred? Find out more at actuariallysound dot com.

Asking for an exception

What a member can do when a drug isn't covered depends on how the plan is set up.

• Insured individual and small group plans. Non-grandfathered plans that cover the ACA's essential health benefits must have a formulary exceptions process. A standard request gets a decision within 72 hours, an urgent (expedited) request within 24 hours, and a denied request can go to an independent reviewer on the same clocks (45 CFR 156.122).
• Self-funded and large group plans. These plans aren't required to cover essential health benefits (Federal Register, 2013), so that federal exceptions rule doesn't apply. Members still have the right to file a claim and appeal a denial under ERISA's claims procedures (29 CFR 2560.503-1), plus independent external review for non-grandfathered plans, and many plans and PBMs run their own exception programs.
• Contraceptives. Non-grandfathered group plans, self-funded included, that use medical management for contraceptives must have an easily accessible exceptions process, so a member can get a contraceptive the attending provider finds medically necessary (some religious and moral objectors are exempt) (ACA FAQs Part 54, July 2022).

State insurance laws can add their own requirements for insured plans.

Mid-year changes. Formularies can change during a plan year. For group plans, self-funded included, a material mid-year change that would alter what the plan's Summary of Benefits and Coverage says requires 60 days' advance notice (45 CFR 147.200); whether a particular formulary change triggers that notice is a legal judgment. Medicare's 30-day notice rule for drug changes applies only to Medicare drug plans.

Who sets the tier

Formulary decisions usually happen in two steps.

First, a clinical review. At each of the three largest PBMs, a pharmacy and therapeutics (P&T) committee of physicians and pharmacists reviews drugs on safety, effectiveness and the clinical evidence. Each PBM describes its committee as independent, and CVS Caremark and Express Scripts say their committees don't see rebate or net-cost information (CVS Caremark, Express Scripts, Optum Rx). Insured plans that cover essential health benefits are required to use a P&T committee (45 CFR 156.122).

Then, a business review. Each of those PBMs also has an internal committee that weighs cost. CVS Caremark's considers factors including plan sponsor cost and manufacturer agreements; Express Scripts' weighs net cost, market share and utilization of clinically similar drugs; Optum Rx's considers net cost against clinical alternatives. At CVS Caremark and Express Scripts, tier recommendations then go back to the P&T committee for approval; Optum Rx says its P&T committee reviews those decisions for clinical concerns.

Where rebates come in. Manufacturers often pay rebates in exchange for favorable formulary placement (FTC interim staff report, July 2024). In its November 2026 PBM rule, the Department of Labor noted "one commonly cited concern" that PBMs have an incentive to select certain high-list-price drugs for formularies because of the size of the rebate payments (Federal Register, November 2, 2026). That's a concern DOL reported, not a finding that rebates decide placement. A drug with a large rebate can still be the lower-net-cost choice; whether it is depends on who keeps the rebate.

What the new rule requires. For self-insured ERISA group health plans of employers averaging 100 or more employees, and multiemployer or multiple-employer plans with 100 or more participants, the rule requires covered PBMs to describe any manufacturer incentives for formulary placement and how they align with the plan's interests. For rebated drugs whose rebates aren't passed through to the plan, they must also list the equivalent alternatives left off the formulary and say why. If the PBM can change the formulary during the contract, it has to explain why and how often, and give advance notice of changes expected to have a material effect (5% or more) on its pay. The rule takes effect January 4, 2027, for plan years beginning on or after July 1, 2027. It doesn't apply to fully insured plans.

Common misunderstandings

Questions to ask your broker

1. Which formulary does our plan use, and how often does it change? Ask whether it's the PBM's or carrier's standard formulary or a custom one, when changes take effect, and how members are told before a drug moves tiers or is excluded. Ask for a list of this year's changes that affected your members.
2. What happens when a member's drug isn't covered? Ask how a member or their doctor requests an exception, how fast decisions are made, and how appeals work. If you're in a non-grandfathered, fully insured small group plan, the federal 72-hour and 24-hour clocks apply; if you're large group or self-funded, ask what your carrier's or PBM's process promises.
3. Who keeps the rebates on our plan, and do they affect which drugs are preferred? If you're fully insured, the carrier and its PBM usually keep or share the rebates, so ask how they factor into your premium. If you're self-funded, ask how much is passed through to the plan, and whether a preferred drug is the lowest net cost to you or just carries the biggest rebate. Pharmacy Rebates covers it in more depth.