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

When you pick up a prescription at the pharmacy, you might not realize that your out-of-pocket cost isn’t just about the drug-it’s shaped by a hidden system called a formulary. Most employer-sponsored health plans use tiered formularies to decide which drugs cost you $10, $40, or even $200. And in nearly every case, generics are the cheapest option-not because they’re less effective, but because the system is designed to push them hard.

Why Generics Are the Default Choice

The FDA confirms that generic drugs are just as safe and effective as brand-name versions. They contain the same active ingredients, work the same way, and meet the same quality standards. The only real difference? Price. Generics cost 80-85% less because manufacturers don’t have to repeat expensive clinical trials or run billion-dollar ad campaigns. That’s why employers and their pharmacy benefit managers (PBMs) push generics so hard.

In 2023, generic medications 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 are one of the biggest drivers of premium increases. By steering employees toward generics, companies can keep health plans affordable for everyone.

How Tiered Formularies Work

Most employer plans divide drugs into four tiers:

• Tier 1: Generics - Usually $10 or less per prescription
• Tier 2: Preferred brand-name drugs - Around $40
• Tier 3: Non-preferred brand-name drugs - Typically $75
• Tier 4: Specialty drugs - Often hundreds of dollars, sometimes requiring prior authorization

If a brand-name drug you’re taking becomes available as a generic, your plan will automatically move the brand version to Tier 4-and the generic to Tier 1. That means if you keep taking the brand-name version, your cost could jump from $10 to $75 overnight. No warning. No notice. Just a higher bill at the counter.

This isn’t just theory. Ohio’s state employer plans, managed by OptumRx, do this exact thing. So do Anthem, CVS Caremark, and Express Scripts-three PBMs that control prescription access for over 80% of Americans with employer coverage.

What Happens When Your Drug Gets Removed

In January 2024, each of the three largest PBMs removed more than 600 drugs from their formularies. That’s over 1,800 medications pulled in a single month. Why? To pressure drugmakers into giving bigger rebates.

This is called a “formulary exclusion.” If a manufacturer won’t offer a deep enough discount, the PBM simply won’t cover the drug anymore. The result? You can’t get it through your plan unless you pay full price-or your doctor files a medical exception.

Let’s say you’ve been taking a brand-name asthma inhaler for years. One day, you go to refill it and find it’s no longer on the formulary. Your plan won’t pay for it. You have three options:

1. Switch to a generic or preferred alternative (if one exists)
2. Pay out of pocket-sometimes hundreds of dollars per month
3. Ask your doctor to request a coverage exception

Exceptions aren’t guaranteed. They require documentation proving the drug is medically necessary and that alternatives either won’t work or caused side effects. It’s a bureaucratic hurdle many employees don’t know how to navigate.

Why You Might Not See the Savings

Here’s the twist: the money saved from generics and formulary exclusions doesn’t always go to you.

PBMs use a pricing model called gross-to-net (GTN). A drug might have a list price of $100, but after rebates, discounts, and returns, the PBM pays only $45. That 55% difference? That’s the GTN spread. KPMG found that average in 2023.

The problem? PBMs often keep a big chunk of those rebates. Instead of lowering your copay, they use the savings to boost their own profits. So even though your plan saves $150 billion a year on generics, your $10 copay might not drop to $5. You’re not seeing the full benefit.

Scott Glovsky, a healthcare analyst, calls this a “disconnect.” The system is designed to save money-but not necessarily to save you money.

What You Can Do to Save Money

You don’t have to accept whatever your plan throws at you. Here’s how to take control:

• Check your formulary - Go to your insurer’s website and search for your medication. Look for the tier and copay. If it’s not listed, it’s not covered.
• Ask about generics - If your doctor prescribes a brand-name drug, ask: “Is there a generic version?” Many don’t realize generics exist.
• Use in-network pharmacies - Some plans, like HealthOptions.org’s Price Assure Program, automatically lower the cost of generics at in-network pharmacies. Out-of-network? You could pay double.
• Call your insurer - Don’t rely on your employer’s HR portal. Call your plan directly. Ask: “Is this drug on the formulary? What’s my copay? Is there a preferred alternative?”
• Review your Summary of Benefits - This document, required by law, explains your drug coverage. Look for the “Prescription Drugs” section. It will show you tiers, limits, and exceptions.

What Employers Should Be Doing

Employers aren’t just paying for coverage-they’re shaping health outcomes. The best ones don’t just hand out a benefits brochure and walk away. They educate.

Schauer Group found that many employees would use generics-if they understood they were safe and cheaper. But too many believe generics are “weaker” or “old drugs.” That’s misinformation. Employers can fix this with simple, clear messages:

• Emails explaining how generics work
• Payroll stuffers with real cost comparisons
• Short videos from pharmacists
• One-on-one help from care managers

Some employers now offer Chronic Illness Support Programs (CISP) for employees with conditions like diabetes, COPD, or heart disease. These programs help patients find affordable alternatives, manage refills, and avoid gaps in care.

What’s Changing in 2026

The trend isn’t slowing. PBMs are getting more aggressive with formulary exclusions. Drugmakers are fighting back with lawsuits and lobbying. Regulators are starting to look at the GTN spread-and whether PBMs should be required to pass savings directly to consumers.

Meanwhile, employers are doubling down on Consumer Driven Health Plans (CDHPs), which pair high-deductible plans with health savings accounts. These plans make employees more price-conscious-and more likely to choose generics.

The bottom line? Generic drugs are the backbone of modern employer coverage. They’re safe, proven, and dramatically cheaper. But the system is complex-and not always transparent.

If you’re on a chronic medication, don’t assume your plan won’t change. Check your formulary every few months. Ask questions. Push for alternatives. And remember: your health isn’t just about the drug-it’s about understanding how your plan works.