The cost of prescriptions and their widespread use make pharmacy insurance—also called prescription drug coverage—a significant part of a comprehensive health insurance plan.
According to the CDC, between 2015 and 2018, 48.6% of adults used at least one prescription drug in the prior 30 days, 24% used three or more, and 12.8% used five or more.
But as drug prices rise, many insurance companies have put more restrictions on what they will and will not cover, and out-of-pocket caps continue to rise.
This article explains the types of prescription drug coverage available, as well as the rules and regulations that apply to drug coverage.
Healthcare Reform
Prior to the Affordable Care Act (ACA), close to 20% of individual/family health insurance plans did not cover prescription medications, according to a HealthPocket analysis.
The ACA set a standard of essential health benefits, which includes prescription drug coverage on all individual and small group health plans with effective dates of 2014 or later.
Plans that took effect before 2014 are considered grandmothered (plans in effect before the end of 2013) or grandfathered (plans already in effect when the ACA was signed into law on March 23, 2010). These plans are also referred to as “non-enforcement policies” because most ACA rules are not enforced for them.
Large group plans and self-insured plans are not required to cover the ACA's essential health benefits other than preventive care. However, the vast majority of these plans do provide prescription drug coverage. (In most states, "large group" means an employer that has at least 51 employees, although there are a few states that set the threshold for large group at 101 employees.)
Prescription drug spending in the United States grew to nearly $406 billion in 2022 (an 8.4% increase from the year before), accounting for more than 9% of total health expenditures.
How Insurance Covers Prescriptions
There's wide variation in terms of how health plans cover prescription drugs and rules can vary from state to state. There are various benefit designs that health plans can use to cover prescription drugs:
- Copays: This is the set amount that you pay for prescriptions. Copays are typically set in tiers according to the plan's formulary. For example, a plan might charge $10/$25/$50 for Tier 1/Tier 2/Tier 3 drugs, respectively, with no deductible or other cost-sharing.
- Coinsurance: You pay a percentage of the prescription cost and insurance covers the rest. This is typically an 80/20 or 70/30 split, meaning you pay 20% or 30% and your insurance covers the rest. Many plans with coinsurance require you to pay full price until you have met your deductible, then pay only a percentage of the full cost. Some coinsurance plans, however, require only your percentage until the deductible is met, and then they cover prescriptions at 100%.
- Integrated deductible: An integrated deductible includes both medical and prescription costs. Once the full deductible is met, prescription copays or coinsurance applies. This is a common approach that health plans use, although some plans cover prescriptions without a deductible at all, meaning that copays and/or coinsurance apply to prescription drugs right away, even if no deductible has been met.
- Prescription deductible: Some health plans have a prescription deductible in addition to the medical deductible and it needs to be met before the plan starts to pay for covered prescriptions. Once the deductible is met, a copay or coinsurance applies, typically set according to the drug tier. For example, a plan may have a $500 prescription drug deductible, in addition to a $3,500 medical deductible.
- Out-of-pocket maximum includes prescriptions: As long as the plan is not grandmothered or grandfathered (or Medicare, as described below), it will have to cap total out-of-pocket spending for in-network expenses at no more than the level determined each year by the federal government. Both prescription and medical costs are counted toward the plan's out-of-pocket cap. For 2024, the maximum out-of-pocket limit is $9,450 for an individual and $18,900 for multiple family members on the same policy. For 2025, these limits will decrease (for the first time) to $9,200 and $18,400, respectively.
On a per-capita basis, inflation-adjusted retail prescription drug spending in the U.S. has ballooned over the last six decades, growing from $90 in 1960 to $1,025 in 2017, and to $1,310 by 2021.
A Note About Medicare and Out-Of-Pocket Drug Costs
Original Medicare does not have a cap on out-of-pocket costs, so most beneficiaries have supplemental coverage from an employer-sponsored plan, Medigap, or Medicaid. And unless they have drug coverage under an employer-sponsored plan, most Original Medicare beneficiaries must obtain Part D prescription drug coverage.
But Part D coverage (which can be obtained on its own or as part of a Medicare Advantage plan) historically did not have a cap on out-of-pocket costs.
Fortunately, for millions of Medicare beneficiaries, Part D coverage rules changed as of 2024, under the Inflation Reduction Act. As of 2024, there is no longer a 5% coinsurance for prescription drugs once the "catastrophic" coverage level is reached. And starting in 2025, there will be a $2,000 cap on Part D out-of-pocket costs (inflation-adjusted in future years).
Medicare Advantage plans do have a cap on out-of-pocket costs, which must be no more than $8,850 in 2024. But while most Medicare Advantage plans include integrated drug coverage, the cost of medications does not count towards the plan's out-of-pocket limit. That's because the limit only applies to services covered by Medicare Part A and Part B, which doesn't include prescription drugs.
However, the Inflation Reduction Act's limits on Part D out-of-pocket costs (described above) are applicable regardless of whether the Part D coverage is obtained as a stand-alone plan or as part of a Medicare Advantage plan.
Formularies
The formulary is the list of drugs that your health plan will cover. Health insurers are allowed to develop their own formularies and adjust them as necessary, although they must comply with various state and federal rules.
Within the formulary, drugs are divided into tiers, with the least-expensive drugs typically being in Tier 1and the most expensive drugs listed in a higher tier, usually 4, 5, or 6.
Top-tier drugs tend to be specialty drugs, including injectables and biologics. For these drugs, the consumer will usually have to pay a coinsurance. Some states have restrictions on how much a health plan can require members to pay for specialty drugs in an effort to keep medications affordable.
Requirements
Under the ACA, the formularies for plans sold in the individual and small group markets are required to cover:
- At least one drug in every U.S. Pharmacopeia category and class (note that this is currently determined based on the categories in the USP MMG, but the federal government is considering a switch to USP DC, which includes more categories of drugs).
- The same number of drugs in each category and class as the essential health benefits benchmark plan selected by the state
A pharmacy and therapeutic (P&T) committee must also ensure that the formulary is comprehensive and compliant.
Although every general category of medications under the USP MMG must be covered, specific medications do not have to be covered by every plan.
One example is insulin. Every plan must cover rapid-acting insulin. However, a plan may cover its preferred brand, such as Novo Nordisk's NovoLog (insulin aspart), but not Lilly's Humalog (insulin lispro).
The same concept applies to contraception. Although the ACA requires health plans to fully cover (meaning without copays, coinsurance, or deductibles) all types of FDA-approved contraception for women, each health plan can decide which specific contraception they'll cover within each type. For other versions of that type of contraception, the plan can require cost-sharing—or not cover them at all.
If your medication is not covered and you and your healthcare provider believe it is an essential medication for your health, you can file an appeal.
Restrictions
Most formularies have procedures to limit or restrict certain medications. Common restrictions include:
- Prior authorization: Before filling certain prescriptions you may need prior authorization, which means your healthcare provider must submit the prescription to your insurance before coverage is approved.
- Quality care dosing:Your health plan may check your prescriptions to ensure that the quantity and dosage are consistent with the recommendations of the FDA before approving coverage.
- Step therapy: Some plans may require you to try a less expensive medication first before approving coverage of a more expensive drug.
Medicare
Unlike private health insurance plans, Original Medicare (Medicare Parts A and B) does not cover prescription drugs. Medicare Part D was established in 2003 to provide prescription coverage for Medicare enrollees and requires buying a private prescription plan.
There are a few avenues for obtaining prescription coverage once you're eligible for Medicare, which is typically age 65 (or younger if you meet disability qualifications). The options are:
- A stand-alone Medicare Part D Prescription Drug Plan, which can be used in tandem with Original Medicare
- AMedicare Advantage plan that includes Part D prescription drug coverage (these Medicare Advantage plans are known as MA-PDs). The majority of Medicare Advantage plans are MA-PDs.
- Supplemental coverage from Medicaid (the coverage will be via Part D) or your employer or a spouse's employer (including retiree coverage that's considered comparable to Part D coverage)
As discussed above, Medicare Part D coverage no longer has unlimited out-of-pocket exposure as of 2024. And out-of-pocket exposure under Part D will be further reduced starting in 2025. These changes are a result of the Inflation Reduction Act, which was enacted in 2022.
Medicaid
Medicaid is ajoint Federal-State program that pays for medical assistance for individuals and families with low incomes and relatively few assets.Prescription drugs are covered by Medicaid in every state, with recipients paying either a small copay or nothing.
However, people who are dual-eligible for Medicaid and Medicare receive prescription drug coverage through Medicare Part D.
Medicare beneficiaries who meet certain financial qualifications can enroll in an Extra Help program (low-income subsidy), which pays the premium and most of the cost-sharing for the prescription plan. As of 2024, full Extra Help is available to more people, as a result of the Inflation Reduction Act (before 2024, some people qualified for partial Extra Help, but those beneficiaries now qualify for full Extra Help).
Other Options
If you have a grandmothered or grandfathered plan that doesn't cover prescription drugs or limits your coverage to only generic drugs, or if you're uninsured, stand-alone prescription drug insurance plans and discount plans are available.
Insurance companies, pharmacies, drug manufacturers, or advocacy/membership organizations such as AARP can offer these plans.
Drug manufacturers sometimes offer patient assistance programs and coupons that can significantly reduce the cost of medications for people whose health plans don't cover the medication.
Stand-Alone Drug Coverage
Prescription drug insurance is available as a stand-alone plan. It works similarly to medical insurance: You pay an annual premium and then have a copay or coinsurance cost at the pharmacy.
The most well-known type of stand-alone plan is Medicare Part D, though privately-run plans do exist. If you're considering this sort of plan, read the fine print very carefully so you know what is covered.
With the exception of Medicare Part D, most of the stand-alone drug plans that are marketed to consumers are actually drug discount plans, which is different than drug insurance.
Drug Discount Plan
While not insurance, drug discount plans are worth knowing about in this context, as they can help you bridge the gap when it comes to out-of-pocket costs.
Plans are often offered by chain pharmacies and drug manufacturers.On a discount plan, you'll get a certain percentage discount, similar to using a coupon. You may pay a monthly or annual fee and receive a card to present to your pharmacist. Some plans, like Refill Wise, are free to use but only good at certain pharmacies.
If you need a prescription that is expensive, check the manufacturer’s website for a drug discount plan. Some coupons are only available for use without insurance, while others may cover the copay or coinsurance cost.
Even with a discount plan, you may still pay a considerable amount for high-cost drugs. And if you're using a drug that isn't covered by your health plan and you instead use a discount program to get a reduced price, the amount you pay will not count toward your health plan's annual out-of-pocket maximum.
Summary
Most health plans in the U.S. have integrated prescription drug coverage. However, Original Medicare does not; beneficiaries need to obtain Medicaid Part D prescription drug coverage if they don't have prescription drug coverage from an employer.
In the individual and small group markets, all health plans with effective dates of 2014 or later are required to include comprehensive prescription drug coverage. The formulary (covered drug list) must be developed according to regulations that are designed to protect consumers and ensure that their coverage is adequate.
Medicaid also includes prescription drug coverage. Large group health plans are not specifically required to include drug coverage, but virtually all of them do, in order to keep their benefits package competitive.
