Employer Health Plans and Generic Preferences: How Formularies Control Your Drug Costs

When you pick up a prescription at the pharmacy, you might not think about why your generic pill costs $10 while the brand-name version costs $75. But behind that price difference is a complex system designed by your employer’s health plan-and it’s not always working in your favor.

Why Your Plan Pushes Generic Drugs

Your employer’s health plan doesn’t just prefer generic drugs-it actively pushes them. Why? Because generics are 80-85% cheaper than brand-name drugs. The FDA confirms they’re just as safe and effective. The difference isn’t in quality-it’s in cost. Brand-name makers spend millions on advertising, clinical trials, and marketing. Generic manufacturers skip all that. They just copy the active ingredient and sell it for a fraction of the price.

That’s why 99% of large employer health plans include prescription drug coverage, and nearly all of them put generics in the lowest cost tier. In most plans, Tier 1 is for generics. That means you pay $10 or less. Tier 2 might be preferred brand-name drugs-maybe $40. Tier 3 is non-preferred brands-$75 or more. And Tier 4? That’s for specialty drugs, often costing hundreds per month.

When a brand-name drug goes generic, the system automatically shifts. The new generic lands in Tier 1. The old brand name gets kicked to Tier 4. If you keep taking the brand, your out-of-pocket cost jumps from $40 to $75-or worse. It’s not a coincidence. It’s designed that way.

How Formularies Work (And Why They Change Without Warning)

Your plan’s formulary is a list of drugs it covers-and how much you pay for each. It’s not fixed. It changes constantly. The Ohio Department of Administrative Services says these changes can happen anytime, with no advance notice. That’s because Pharmacy Benefit Managers (PBMs)-like OptumRx, CVS Caremark, and Express Scripts-control the list.

PBMs don’t just manage claims. They negotiate with drug makers. And their biggest tool? Exclusion. In January 2024, each of the three biggest PBMs removed over 600 drugs from their formularies. That’s more than 1,800 drugs pulled nationwide in one month. Why? To pressure drug companies into offering bigger discounts. If a company won’t give a good rebate, the drug gets dropped.

Here’s the catch: you might not know your medication was removed until you show up at the pharmacy and it’s denied. You might be on a stable medication for diabetes, high blood pressure, or asthma-and suddenly, your plan won’t cover it anymore. You’re left with two options: pay full price, or ask for a medical exception. Neither is easy.

The Hidden Gap: Why You Don’t See the Savings

You’ve heard that generics save $3 billion a week. That’s true. But here’s what no one tells you: those savings don’t always reach you.

PBMs use something called gross-to-net pricing. A drug’s list price might be $100. But after rebates, discounts, and returns, the PBM pays $45. That 55% difference? That’s the GTN spread. The drug company pays the PBM a rebate to keep the drug on the formulary. The PBM keeps part of that rebate. You never see it.

So even though your plan saves money by switching you to a generic, your copay stays the same. The savings go to the PBM and your employer-not to your wallet. Some employers pass savings along in lower premiums. Others don’t. You’re left wondering why your drug costs didn’t drop, even though the system claims to be saving money.

What You Can Do to Protect Yourself

You can’t control your plan’s formulary. But you can control how you respond to it.

• Check your formulary every time you refill. Don’t assume your drug is still covered. Visit your insurer’s website or call them directly. Look for the “Drug List” or “Formulary” section in your Summary of Benefits and Coverage.
• Ask if a generic is available. Even if your doctor prescribed a brand name, ask if a generic version exists. Many drugs have generics you didn’t know about.
• Use in-network pharmacies. Some plans, like HealthOptions.org’s Price Assure Program, automatically lower your cost for generics at in-network pharmacies. Out-of-network? You could pay double.
• Request a formulary exception. If your drug was removed or moved to a high tier, your doctor can file an exception. You’ll need to prove medical necessity-like if the generic didn’t work or caused side effects.
• Use care management programs. Many employer plans offer care managers who help you find affordable alternatives. Call your insurer and ask if one is available.

When Your Employer Uses a CDHP

Consumer-Driven Health Plans (CDHPs) are growing fast. These plans combine high deductibles with health savings accounts (HSAs). They’re designed to make you more price-conscious.

That sounds good-until you realize your HSA contributions might not cover your drug costs. If you’re on a chronic condition like diabetes or COPD, your monthly drug bill could be $300 or more. Even with a generic, you might pay $75 per month. That’s $900 a year. Your HSA might not keep up.

Employers using CDHPs often push generics harder because they’re the only way to make the math work. But they also need to educate employees. Schauer Group found that many people are willing to use generics-they just don’t know enough to feel comfortable. Your employer should be giving you clear info: emails, payroll inserts, videos, even text alerts when your drug changes tiers.

If they’re not, ask. Demand it. You’re paying for this benefit. You deserve to understand how it works.

The Bigger Picture: Who Really Controls Your Medicine?

Your employer picks the plan. But the PBM writes the rules. And the drug maker writes the price. You’re caught in the middle.

Three PBMs control most employer plans. They decide which drugs are covered, which aren’t, and how much you pay. They use exclusions as leverage to force drug makers into deeper discounts. But you’re the one who loses access when a drug disappears from the list.

There’s no easy fix. But awareness helps. The more you understand how formularies work, the less likely you are to be blindsided. You’ll know to check your coverage before your refill. You’ll know to ask for alternatives. You’ll know to push back when your drug is pulled.

Generic drugs aren’t the enemy. They’re the solution. But the system around them is broken. It saves money-but not always for you. The real challenge isn’t finding cheaper drugs. It’s making sure the savings reach the people who need them most.