Safety, effectiveness, cost: How medications get approved for coverage by your health plan

Starting a new prescription medication can feel mysterious. Before you even start taking the new drug, you may wonder: Is it safe to use? Will it work well? And will it cost just a few dollars, or take a bite out of my monthly budget?

You may not be aware of it, but your health plan has already posed these important questions to health care experts. It’s part of the process for creating and managing a drug formulary, the framework that guides your pharmacy benefits.

“A formulary is simply a list of prescription medications approved for coverage by your health insurance,” explains pharmacist Noelle Redmond, assistant director of clinical pharmacy services for Regence BlueCross BlueShield. “The approved list reflects the drugs that are covered at various levels, with certain ones being preferred for reasons of safety, efficacy or cost.”

Experts like Redmond spend a lot of time reviewing scientific research and gathering information about the prescriptions that are on a health plan’s formulary. Their main goal is to make sure the approved drugs work well and are widely considered safe to use.

If a treatment isn’t on the list, it’s considered “nonformulary,” which usually means higher out-of-pocket costs or no coverage for the medication.

A formulary can include name-brand and generic drugs. At Regence, the price of a medication is only considered after the pharmacy team concludes that it is safe and effective, Redmond adds. “We're only going to look at cost if everything else is equal.”

Who creates a drug formulary?

Health plans create their drug formularies based on medical research and input from specialists. Before they get to that point, however, the medication has to be considered a covered service. Coverage decisions are made based on an agreement between your health plan and the organization that you get health insurance through (usually an employer or a government program like Medicare or CHIP). Federal and state regulations also play a role.

“When you or your employer group has insurance, it is actually a contract with the health plan,” Redmond says. "There are rules in there, which you can find in the plan description that gets sent to members.”

For example, drugs for weight loss are not a covered service, so you wouldn’t find them on a health plan’s approved list. Once a medication is included as a covered service, however, it can be considered for the formulary.

Recommendations for what goes on the list are made by a group called a pharmacy and therapeutics (P&T) committee. Each health plan or hospital system has its own committee, composed of doctors, pharmacists and other experts who review medication data and make formulary recommendations.

Regence’s P&T committee also includes consumer representatives, nurses and doctors who practice in the communities it serves. These committee members aren’t affiliated with the health plan, ensuring their independence in the process.

Pharmacists on Regence’s medication research team compile and analyze information to share with the P&T committee. They come from a variety of backgrounds, too. Some, like Redmond, have worked in community health. Others are from hospitals or cancer specialists or have expertise in pharmaceutical development. Redmond says this allows the committee to take a “humanistic approach” to its formulary.

How does a medication get approved?

The P&T committee builds its list of approved medications by closely tracking:

• How well the drug works (efficacy).
• Any potential risks or side effects (safety).
• Whether it’s widely used (standard of care).
• The needs of patients, including health equity and whether alternative drugs are readily available (practical considerations).
• The medication’s price and how it relates to overall health care costs (cost).

The process is ongoing, as drug formularies can change over time. To ensure that its list remains up to date, Regence routinely updates its formulary to reflect new drug approvals, changes in the market, and the latest information about safety and effectiveness.

When a formulary change is likely, member advocates like Kristen Lilley step in.

As Regence’s pharmacy consumer experience manager, Lilley’s job is to anticipate how a given update will affect people’s prescription benefits, and to help smooth the way.

“I focus on really putting a member-centric perspective on formulary changes that are coming up,” she says. “I make sure I’m understanding the disruption and how to communicate to members who are affected to help them navigate it.”

How does FDA approval fit in?

Your health plan’s P&T committee makes the ultimate decision about the formulary’s contents, so what role does the U.S. Food and Drug Administration play?

The FDA approves drugs for safety and effectiveness. This alone isn’t a guarantee that a given medication will be included on your formulary, though. Each insurance company does its own analysis of scientific research, medical guidelines and pharmacy policies before deciding if a treatment should be covered.

In other words, while FDA approval means a drug has met certain standards, it doesn't mean the medication is necessarily covered under your health plan or the best or most cost-effective option for your specific needs. 

It’s also important to know that the clinical testing required for FDA approval doesn’t include every type of person who might use the treatment once it’s widely available in the marketplace.

Often, clinical trials involve fewer than 1,000 patients who are observed for six months or less, a 2017 Yale University study found. This means that side effects may become clear only after the treatment is used on a larger population. In fact, the Yale study found that in the decade after approval, the FDA announced alerts, warnings or recalls on about one-third of the drugs it had approved.

A balance between individual and population health

Drug formularies generally use a tiered system to set the cost of medications for your health plan.

The system categorizes drugs into different levels based on the type of medication and its overall value. Patients’ cost-sharing responsibility (copay or coinsurance) rises with each level. There can be three to six tiers, though four is a common structure. The categories generally fall along these lines:

• Tier 1: Generic drugs.
• Tier 2: Preferred brand-name medications. These may not have a generic equivalent but are still cost-effective.
• Tier 3: Nonpreferred brand-name drugs, which have a higher cost-sharing expectation.
• Tier 4: Specialty medications. These have the highest level of cost-sharing.

The tiering system encourages the use of the highest value and equally or more effective medications when possible. This helps address both individual needs and the overall cost of health care. Understanding how it works can help you save money on prescriptions, too.

A collaborative effort

As Redmond and Lilley note, the formulary has to strike a delicate balance, making sure that members get effective treatments and that premiums don’t rise too fast. They do so by creating a system of checks and balances along the way.

“We don't operate in a vacuum,” Redmond says. “We're really trying to pay attention to the human at the end of the equation. We get expert feedback all along the way, and our final approval body is composed of people who don't work here. This is our way of making sure that we've got it right, and that we're validating our recommendations with the people who actually take care of patients.”

For her part, Lilley highlights how much this is a collaborative effort at all levels. She lives in a small mountain town, and when she runs into friends and neighbors, they often share stories about being frustrated with their prescription benefits. When she explains Regence’s formulary process, they’re surprised to find out how many people are involved in developing the list.

“I tell them all the time, there are people inside of Regence that continually champion members. Our full-time job is to make sure that we're leaving nobody behind and there's a voice at the table when decisions are being made.”

Still have questions about your medication coverage? Get answers at any time through the Ask a Pharmacist tool in your regence.com account.

You can find other ways to manage prescription costs on regence.com.

Jillian Cohan Martin is a journalist and content strategist based in Portland, Oregon.