Complete Guide to Out-of-Pocket Costs on Prescriptions

Category: Prescription Related Questions


Posted on November 29, 2021

Scott is passionate about health and wellness, and enjoys writing on various topic surrounding these fields. Scott lives in Seattle and spends his free time restoring old furniture and playing pickleball with his friends.

out-of-pocket costs

If you're thinking about getting a health insurance plan, prescription coverage is something you should consider carefully. According to research, 66% of adults who use prescribed drugs say it constitutes a significant portion of their health expenditures.

The real challenge however, is the out-of-pocket costs on prescriptions associated with most plans. Which drugs do health insurance plans cover and leave out?

This article goes deeper into what out-of-pocket costs prescriptions are, drugs covered under the plans, and how to reduce prescription out-of-pocket costs.

What Is Out-of-Pocket Cost?

Out-of-pocket expense is a general term describing the costs individuals pay from their cash reserves to be reimbursed later. It applies to almost every industry, including real estate, formal employment, and even healthcare.

In healthcare, out-of-pocket costs refer to the amount you pay as coinsurance, copayments, or deductibles. A deductible is an annual amount set by the insurer to meet before your coverage kicks in.

All health insurance plans have prescription coverage, but different plans cover different drug prescriptions at other costs.

Types of Prescription Drug Coverage

Prescription drugs covered under a health insurance plan vary from state to state, since each state has a benchmark plan to guide all other methods. 

So, insurance firms categorize prescription drugs covered into higher and lower tiers. Medicines listed on the higher levels are expensive, and hence cost more from out-of-pocket, while those on the lower are less. They rank depending on:

  • Cost of the drug
  • Drug availability
  • Clinical effectiveness of the drug
  • How the drug compares to others used for similar treatment
  • Connection to standard care
  • Additional factors such as storage and delivery

Therefore, it is prudent to consider some of the criteria used in ranking the drugs before you decide on which way to go. This will help you avoid inconveniences along the way with your insurance.

Tier 1

Tier one drugs are the lowest among all because they have the lowest prices. Medicines in this category are generally generic, but work almost the same as those from named brands. So from Tier One drugs, you get the same treatment at a lower price.

Tier 2

Prescribed drugs in Tier Two are slightly better versions than those in Tier One. They constitute some brand-name medications and are the most recommended by insurers for their efficiency and price.

 Tier 3

These are exclusive brand-name medications that cost more than Tier 1 and Two combined, and are non-preferred by insurers. 

Besides, Tier 3 drugs usually require authorization, where your doctor writes to the insurer explaining the need for the medication before an insurance provider can finance the bill. Because of their quality, they demand higher co-pays and out-of-pocket expenses.

Tier 4

This category came into existence in 2009 to accommodate new pharmaceutical drugs in the market. Typically, medications in Tier 4 are newly approved and cost the most in insurance premiums and out-of-pocket expenses, thus highly discouraged by most insurers.

These drugs treat rare conditions, and they require pre-authorization before the payer agrees. Typically, your doctor explains to the insurer why this drug is preferable to other cheaper options in the market.

However, most insurers don't cover the entire costs of treatment drugs in Tier four. Instead, they do cost-sharing where you pay a specific percentage, and they top up the rest.

For example, if a chemotherapy drug costs $1500 a month, you may pay $600 or more or less, while the insurer clears the balance, depending on the insurance policy.

Remember, not all insurance providers classify their drugs in tiers, and if they do, it may be different from others. Therefore, understand each health plan before subscribing to one.

Which Prescription Drugs Covered Under Health Plans?

It's impossible to find an insurance plan that covers all types of prescription drugs. So, always confirm if the medicines prescribed to you are listed on the formulary. This is a list of prescription drugs that the insurer agrees to cover during your time as a policyholder.

The formulary includes both generic and brand-name medications, organized according to the tier of drugs. Generally, a formulary comes with the plan, and you can find it on the company's website. It is sub-divided into three sections. 

The first row is the type of drugs covered by the plan written in italics for generic medicines, and capital letters for brand names. Next is the tire and pricing category, where drugs are priced according to their respective tiers.

Finally, the last section is reserved for special rules to follow for each drug. Here, you'll find details like if a drug requires prior authorization, the quantity to use, and each drug's limit.

There are two ways to identify specific drugs on the formulary. The first method involves searching by category where you can find a drug by its problem category. For example, under gastrointestinal agents, there's omeprazole medication for stomach problems. 

On the other hand, you can locate drugs by index. This involves going through the list of drugs in alphabetical order. But what if you can't find a specific cure listed in the formulary? 

Well, most insurers make sure that there's an alternative drug for every condition listed, but a drug may have no replacement in some cases.

If a drug isn't on the formulary list and there's no alternative, the only solution is to ask your doctor to request a formulary exception. This is a formal request written by your doctor to the insurer requesting unique insurance cover.

Even if an insurer approves a specific medication, they'll only cover a small portion of the asking price, while the rest is an out-of-pocket cost. Typically, the cost of drugs absent from the formulary is equivalent to those in Tier 4.

Out-of-Pocket Costs of Prescription Drugs

How much will your out-of-pocket health insurance costs for medication amount to? Well, if you have an insurance plan, it varies from one insurance firm to another due to the factors listed below:

Preferred Plan

Every health insurance plan has its way of determining how much to cost-share with its policyholders. But, when it involves prescription drugs costs, most typically use the drug tiers to set the amount they're willing to cover.

The higher the level, the more expensive your out-of-pocket costs on prescription drugs, since insurers only cover part of the sum.

Furthermore, if your insurance plan has incentives, such as discounted rates for the first 90-days worth of supplies, it could reduce your out-of-pocket costs.

Pharmacy of Choice

Where you buy prescribed drugs could determine the costs you incur as a result. For example, research shows pharmacies in the same city could have significant differences in drug prices.

While most pharmaceuticals set their costs based on business costs and profit margins, pharmacies within the plan's network have lower costs. This means you can trace specific pharmacies, as recommended by your insurer, to get discounted rates on medication.

Formulary List

Is your medication among the list of covered drugs? Typically, medications inside the formulary list include those accepted and protected by the insurer with more standardized prices than those outside the list.

Even though some insurance may make exceptions on a case-to-case basis as presented by the resident doctor, many don't cover drugs outside the formulary.

The type of Deductible

The plan you have will determine the type of deductible you get, and in turn, the out-of-pocket expenses. Insurance plans usually have either one of these three deductibles:

Before Deductible Cover

If your insurance plan covers your prescription costs before you meet the deductible, your expenses could be significantly lower. Here, an insurer can agree to cost-share through copayment or coinsurance, depending on the drugs you take.

For example, for a generic drug, your copayment cost may be 20%, while for a named brand, the fixed price is 40%. So it all depends on the drug and tier.

After Deductible Cover

If your insurance plan demands that you meet the deductible before prescription cover kicks in, it could increase your out-of-pocket expenses. According to research, the current family plan deductible is $8,439, a 5% increase from the previous year.

Insurance plans with a deductible could increase your out-of-pocket prescription for the duration before you meet the set deductible.

Special Deductible Cover

Some health insurance plans have special deductibles for certain prescribed drugs. This means that once you buy a prescribed drug to the deductible limit, the insurer will pay for part of the medication out-of-pocket expenses.

Since this is a special deductible, it remains separate from the overall deductible and has lower rates. Here, cost-sharing is usually done through copayment.

How to Reduce Out-of-Pocket Prescription Costs

If you already have insurance or are looking to get one, there are ways you can save up your expenses on prescription drugs such as out-of-pocket costs. These include:

Understand Plan Rules

Before you sign up for an insurance plan, know the type of cover you're getting into. Does it have a deductible or copayment kind of plan since it will determine your out-of-pocket cost? Lastly, determine if the plan classifies drugs according to tiers and the cost of medication in each category.

Assess Different Options

If you plan on taking a health insurance plan, explore your options, since different plans offer different prices for the same medication. Besides, numerous online tools help you compare plans covering your prescription within your area zip code.

Use the Medicare Program

This is one of the initiatives where Medicare covers part of your Medicare out-of-pocket costs. As a result, once you qualify for the program, you buy prescription drugs at a lower price than usual.

Check Formulary

Confirm that the plan has a formulary, and your prescription drugs are among those included in the list. This is because formulary drugs are covered, hence less costly, while those outside the list have generally higher out-of-pocket costs.

What if You Can't Afford Health Insurance on Prescription Costs?

Prescription drugs are becoming expensive by the day, and the annual cost spent on drugs could rise even higher. So how can you minimize prescription expenses with no insurance cover? Here are a couple of ideas:

Seek Less Expensive Alternatives

The fastest way to reduce the out-of-pocket cost of prescription drugs is to seek cheaper alternatives. While many people prefer named brand medication over generic, they work just as well, but at a reduced price.

Generic drugs are other versions of the original created after the patent of the named brand medication expires. So, when buying or refilling your prescription, ask the pharmacist whether there's a generic version of the drug to take.

Alternatively, you can opt for named brand medications that are slightly cheaper than their counterparts. These drugs are primarily listed among the Tier 2 medications.

Take Time Shopping Around

Different pharmacies charge different prices for a specific medication. So, a drug that costs $5 at a particular chemist in town could go for $40 with another pharmacist. So, ask for pharmacy prices, and take your time while comparing them all. 

There are different ways to shop without leaving the comfort of your home, such as:

Using a comparison site

Comparison sites give you access to local and significant pharmacies sites nearby, and allow you to compare various medications' prices. Some good examples of comparison sites are GoodRx and Rx Price Quotes sites.

Look for an Online Pharmacy

Online pharmacies are generally cheaper than physical ones, since they incur less overhead costs. This means you can find a variety of drugs, yours included, at a slightly lower price than your standard pay.

Just verify that the online pharmacy is a legit vendor selling standardized medicine by the FDA.

Other viable options to look at include:

  • Setting up a flexible spending account
  • Pay with cash, check, or credit
  • Use free coupons
  • Leverage cost-sharing programs

There are several options available for those who may not afford health insurance prescription costs. But, first, you have to know where to look.

Top Out-of-Pocket Costs

There you have it; the complete guide to out-of-pocket costs and prescriptions. If you're looking for an insurance plan, be mindful of deductibles, copayments, and coinsurance. And when hunting for lower prescription prices, check out different pharmacies around and online.

We have simplified our system to suit the needs f every customer. Visit our website today on how to order your prescription drugs.

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