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Understanding Health Insurance


Prescription Benefits
Insurance companies have changed the way they offer prescription drugs in the last few years.
Insurance companies have changed the way they offer prescription drugs in the last few years.
©2006 Publications International, Ltd.

As a large amount of our population ages, spending on prescription drugs is increasing faster than other aspects of health care costs such as hospital visits or physician services. From 1994 to 2003, prescription drug costs rose at double-digit rates each year. Today, prescription drug spending is still rising, but the rise can now be measured in single digits. This slow-down in spending is attributed to a few changes in the world of prescription medication including the way health insurance companies offer prescription drugs to their users. Many insurance plans have excluded high-cost drugs from coverage, cut down on the amount of refills and increased co-pays. The basis of any insurance plan's prescription benefits is a formulary, which is a list of all the drugs your insurance company is willing to pay for.

A formulary can be used in several different ways depending on your exact insurance plan. Some plans will cover drugs both on the formulary, which are referred to as "preferred" drugs and usually include generic drugs, and drugs not found on the formulary, or "nonpreferred" drugs usually including brand-name drugs. However, use of nonpreferred drugs comes at a higher price and you'll usually be charged a higher co-pay. Other insurance plans may be more cut and dry, covering only those drugs on the formulary and denying payment for any drug not on the formulary without some sort of pre-approval process. However, the majority of formularies fall somewhere in between these two types of plans and into a "tiered" formulary. In these plans, drugs are assigned to a tier, with each tier increasing the co-pay amount. Normally, in a three-tier plan generic drugs are found at the cheapest tier-one level. Tier two includes brand-name drugs in which generics are not available, and tier three contains drugs that aren't found in the formulary, or are nonpreferred, and thus are charged an even higher co-pay.

However, if a drug prescribed by your doctor isn't included on your health insurance plan's formulary list, most plans have a prior-authorization process in which a drug may be approved on a case-by-case basis. Usually in these situations, you must have already failed the approved treatments or experienced adverse effects from the approved medication for your ailment. If your coverage is still denied an appeal process is usually available.