Employer Health Plans and Generic Medications: How Formularies Control Your Prescription Costs

When you pick up a prescription at the pharmacy, you might not realize that the price you pay isn’t just about the drug-it’s shaped by a hidden system called a formulary. This is the list your employer’s health plan uses to decide which medications are covered, and how much you’ll pay out of pocket. Most large employers use tiered formularies that strongly favor generic drugs, not because they’re less effective, but because they save money-big time.

Why Your Employer Pushes Generic Drugs

Generic medications aren’t cheap knockoffs. They’re exact copies of brand-name drugs, approved by the FDA as equally safe and effective. The only real difference? Price. Generics cost 80-85% less because they don’t need to repeat expensive clinical trials or run nationwide ad campaigns. That’s why your employer’s health plan pushes them hard.

In 2023, generic drugs saved the U.S. healthcare system over $150 billion in a single year. That’s $3 billion every week. For employers, that’s not just a nice saving-it’s a necessity. Rising drug costs have forced companies to rethink how they offer health benefits. One of the most effective tools? Making generics the default option.

Most employer plans structure coverage in tiers. Tier 1 is almost always reserved for generics. If your prescription is on Tier 1, you might pay just $10 per fill. Tier 2 might be preferred brand-name drugs, costing $40. Tier 3? Non-preferred brands, $75 or more. And Tier 4? That’s for specialty drugs-like those for diabetes, arthritis, or cancer-and those can cost hundreds per month.

How Formularies Work Behind the Scenes

Your plan’s formulary isn’t static. It changes often. When a brand-name drug loses its patent and a generic hits the market, the Pharmacy Benefit Manager (PBM)-the middleman that handles drug coverage for your employer-automatically moves the generic to Tier 1 and the brand version to Tier 4. Suddenly, the same medication you’ve been taking costs seven times more.

For example, if you’ve been on a brand-name blood pressure pill for years, and a generic becomes available, your copay could jump from $40 to $75 overnight. If you don’t switch, you’re paying more-not because the drug changed, but because the system is designed to nudge you toward the cheaper option.

Three PBMs-OptumRx, CVS Caremark, and Express Scripts-control nearly all employer prescription plans in the U.S. These companies don’t just manage claims. They decide which drugs make the list and which get cut. In January 2024, each of these three PBMs removed over 600 drugs from their formularies. That’s more than 1,800 medications taken off coverage in a single month. Why? To pressure drugmakers into offering bigger discounts.

The Hidden Gap: Why Savings Don’t Always Reach You

Here’s where it gets complicated. PBMs negotiate rebates from drugmakers. These are discounts they get after the drug is sold. But here’s the catch: those rebates don’t always go to you, the patient. The difference between the drug’s list price and what the PBM actually pays after rebates is called the gross-to-net (GTN) spread. On average, it’s 55%. That means a drug might be priced at $100, but the PBM pays just $45 after rebates. The rest? Kept by the PBM or used to lower premiums for the employer.

So even though your plan saves money because of generics and rebates, your copay might not drop. In fact, you might still be paying the same $10 for a generic-even though the real cost to the plan is now only $3. The savings stay inside the system, not in your wallet.

This disconnect frustrates many employees. They’re told generics save money, but they don’t see it in their paychecks. Employers, meanwhile, are pressured to keep premiums low. The result? A system that works for the company’s budget-but doesn’t always feel fair to the employee.

What to Do If Your Medication Gets Removed

If you open your prescription bottle one day and find your drug is no longer covered, don’t panic. First, check your plan’s formulary online. Most insurers have searchable drug lists under “Pharmacy Benefits” or “Formulary.” Look up your medication by name. If it’s not there, your plan likely excluded it.

Next, call your insurer. Ask: “Is there a generic alternative?” If yes, ask if you can switch. If no, ask about a medical necessity exception. Your doctor can submit a request explaining why you need the brand-name drug-for example, if you had a bad reaction to the generic, or if it’s not as effective for your condition.

Some employers offer care management programs. These are dedicated staff who help employees find affordable alternatives, apply for patient assistance programs, or navigate prior authorizations. Ask your HR department if your plan includes one.

How to Stay in Control of Your Coverage

You can’t control your employer’s formulary, but you can control how you respond to it. Here’s how:

• Check your formulary every time you refill a prescription. Changes happen without notice.
• Ask your pharmacist: “Is there a generic version?” They often know before you do.
• Use in-network pharmacies. Some plans offer automatic discounts on generics only through certain pharmacies.
• Review your Summary of Benefits and Coverage (SBC) every year during open enrollment. It’s not just about premiums-drug tiers matter just as much.
• If you take multiple prescriptions, ask your doctor about combination pills or alternatives that fall into lower tiers.

Don’t assume your doctor knows what’s covered. Many doctors still default to prescribing brand names because they’re familiar with them. Bring up generics yourself. Say: “I’d like to try the generic if it’s just as good. Can we switch?”

When Generics Aren’t Enough

Some conditions require specialty drugs-like biologics for rheumatoid arthritis or insulin for type 1 diabetes. These drugs don’t have true generics; instead, they have biosimilars, which are similar but not identical. These are often placed in Tier 4 and come with high copays.

For chronic conditions, some employers offer special programs. For example, HealthOptions.org’s Chronic Illness Support Program helps members find lower-cost options, get free delivery, or apply for financial aid. Ask your HR team if your plan has something similar.

If you’re paying over $100 a month for a medication and can’t switch to a cheaper alternative, ask your doctor about manufacturer coupons or patient assistance programs. Many drugmakers offer free or discounted meds to people who qualify based on income.

The Bigger Picture

Employer health plans aren’t trying to trick you. They’re trying to survive. Drug prices keep rising, and without formularies, premiums would climb even faster. The goal is to keep coverage affordable for everyone.

But the system is broken in one key way: the people who pay the most-employees-don’t always see the savings. That’s why transparency is the next big frontier. Some states are starting to require PBMs to pass rebates directly to consumers. Employers are beginning to demand more accountability from their PBM contracts.

For now, the best strategy is simple: know your formulary. Ask questions. Don’t accept the first price you’re given. And remember-generics aren’t second-rate. They’re smart, safe, and proven. If your plan pushes you toward one, it’s not a limitation. It’s a chance to save money without sacrificing care.