How do pharmacy benefits work? A guide to pharmacy terms and benefits + 5 key tips

Pharmacy Painkillers And Vitamin Supplements Choice

How much do you know about your pharmacy benefits? Half of Americans take prescription drugs, yet few of us know how to make the most of what our insurance offers.

“The best way to avoid surprises at the pharmacy is to know what medications your health plan covers and how your pharmacy benefits work,” says Dr. Crystal Cooper, clinical pharmacist at BlueCross BlueShield of Tennessee. “It’s a good idea to review your benefits yearly. And while every plan is different, most allow you to do it online through your personal account, in your health plan’s app or using a hard copy of benefits which you receive by mail. If you’re unsure where to find this information, call your health plan and ask.”

Here’s a guide to common pharmacy terms, as well as 5 tips for making the most of your prescription plan.

What is a formulary?

Dr. Cooper: A formulary, also called a drug list, is a list of prescription drugs covered by your insurance plan. The drugs on this list are selected by a team of doctors and pharmacists with the goal of giving you access to the safest, most effective medications at affordable costs.

What is a drug tier?

Dr. Cooper: Drug lists usually have tiers, which are groups of drugs classified according to cost. The amount you owe for a drug (cost share) is based on the drug’s tier placement. In general, the lower the drug tier number, the less you’ll pay.

Are higher tier drugs better?

Dr. Cooper: No. People sometimes think the more they pay for a medication, the better it must be. This simply isn’t true. More expensive doesn’t automatically equal better or more effective.

How do I know what tier my drugs are on? 

Dr. Cooper: Look on your plan’s drug list (formulary) and there should be a section that shows the drug’s tier.

How do I know what I’ll owe for each tier of drugs?

Dr. Cooper: Your pharmacy benefit information will include a section on prescription drug costs. It will break down your copay or coinsurance by tier, as well as let you know if your plan has a deductible. That’s how you find out your cost share.

  • A copay is a type of cost-sharing where you pay a set amount for a medication. Typically, each drug tier has its own copay.
  • Coinsurance is a type of cost-sharing that requires you to pay a percentage of a drug’s cost rather than a set copay by tier. Coinsurance amounts can fluctuate throughout the year depending on drug cost, progress toward your deductible, etc., so pay attention to those changes over time.
  • A deductible is the amount you must pay for drugs before the plan begins to pay its share.

What is a prior authorization?

Dr. Cooper: A prior authorization is when a provider needs to check with the patient’s health plan about covering a drug before the patient gets the prescription filled. Use your plan’s drug list to see if your medication requires prior authorization.

Health plans use prior authorizations because there are hundreds of different medicines. And more become available every day. Some drugs may have very different prices even though there isn’t a major difference in how effective they are. Requiring prior authorization of certain drugs ensures you get the safest, evidence-based, most cost-effective medications.

What kinds of drugs need prior authorizations?

Dr. Cooper: Drugs that require prior authorization are those that:

  • Have dangerous side effects
  • Are harmful when combined with other drugs
  • Should only be used for certain health conditions
  • Are often misused or abused, such as opioids
  • A doctor prescribes when less expensive drugs might work better

What should I do if my prescription needs prior authorization? 

Dr. Cooper: You or your pharmacist will need to let your doctor know. Your doctor will either:

  • Switch you to another drug that doesn’t need prior authorization, or
  • Submit the prior authorization information to your health plan for review.

Are there any other restrictions that may apply?

Dr. Cooper: Some covered drugs may have extra requirements or coverage limits, such as:

  • Quantity limits: For certain drugs, the health plan limits the amount of a drug the plan will cover. For example, a plan may only cover 90 capsules every 90 days.
  • Step therapy: In some cases, providers will try other approved and effective medications first before having patients try a non-preferred brand name drug. This is done to make sure the drugs covered are safe and cost-effective for patients.
  • Age requirements: Some plans only cover drugs, vaccines or procedures for certain age groups, such as colonoscopies for those 45-50 or older and certain vaccines for pediatric patients or patients 18+.

Look at your formulary to find out if your medicine has these requirements or limits.

What are generic drugs?

Dr. Cooper: A generic medication is a drug created to work the same way and provide the same clinical benefits and risks as their brand-name counterparts. Generics tend to cost significantly less but must be the same as a brand-name in:

  • Dosage
  • Safety
  • Effectiveness
  • Strength
  • Stability
  • Quality
  • The way the drug is taken

Is it okay to ask your doctor to prescribe the lowest-cost option?

Dr. Cooper: Absolutely. If you’re concerned with medication cost, feel free to talk with your healthcare provider openly about that. High drug costs can be a barrier to getting the medicine you need, which puts your health at risk.

However, providers may not have ready access to your pharmacy benefits. So it’s a good idea to take your drug formulary with you to appointments, or to bookmark that information on your phone’s browser. Ask your provider to review your formulary with you to see if a less expensive option is available.

What about cash pay vs. insurance?

Dr. Cooper: Many pharmacies have programs that offer some generic medicines at a flat cost. For example, a pharmacy may charge $4.00 for a 30-day supply of select drugs that treat common chronic conditions such as diabetes or high blood pressure.


Cash pay may be a good value for people without prescription drug coverage. But people with insurance who pay cash for these drugs may find that they pay more than they would have if they used their prescription insurance. Also, if people pay the cash price, it doesn’t count toward meeting their deductible.


Filling a medicine with your prescription insurance can also provide you with better quality care. Because the system automatically reviews each claim to make sure the drug prescribed is right for your age, gender and overall health. The system also reviews the drug for possible interactions, inappropriate dosages and duplicate medications. That’s especially important if you use more than one pharmacy for your prescriptions.

What are the benefits of 90-day supplies?

Dr. Cooper: Many prescription drug plans allow you to fill a 90-day supply of medications instead of the traditional 30-day supply. Getting refills takes less time and work for you. And the health plan may even offer financial incentives for 90-day supplies so you pay less. But, not all prescriptions can be filled for 90 days. Or they may need to be filled at certain pharmacies or via mail order.

Does it matter what pharmacy I use?

Dr. Cooper: In most cases, your prescriptions are covered only if they are filled at a plan’s network pharmacies.

  • A network pharmacy has a contract with your health plan to provide your covered prescription drugs.
  • Plans may also offer preferred pharmacies within their network. While it’s your choice to use a preferred or nonpreferred pharmacy, your cost share may be lower at preferred pharmacies.

Check your pharmacy directory to find network and preferred pharmacies. Many plans offer a searchable online directory, or you can call your plan and ask a representative for help.

What is a mail-order pharmacy? 

Dr. Cooper: A mail-order pharmacy sends medications to you through the mail. Instead of driving to a local pharmacy to pick up your prescriptions, the medication is shipped to you, often in a 90-day supply. And It’s different from an online pharmacy:

  • Mail-order pharmacies operate through your health insurance plan.
  • Online pharmacies operate as a drugstore. They may not accept your health insurance or offer the same lower cost share as a mail-order pharmacy.

What are the best ways to optimize pharmacy benefits?

Dr. Cooper: Take these 5 steps:

  1. Review your pharmacy benefits every year to stay informed of any changes
  2. Ask for a generic medication or lower tier drug when possible
  3. Fill your medicines at an in-network, preferred pharmacy or via mail-order pharmacy
  4. Get a 90-day supply of covered drugs you use regularly when available
  5. Save your health plan’s number in your phone so you can call a representative and ask questions as they arise

More from Dr. Cooper on WellTuned

Ashley Brantley

Ashley Brantley has been writing about food, culture and health for more than a decade, and has lived in three of Tennessee’s four major cities (Memphis, Nashville and Knoxville).

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Get more information about specific health terms, topics and conditions to better manage your health on BlueCross BlueShield of Tennessee members can access wellness-related discounts on fitness products, gym memberships, healthy eating and more through Blue365®. BCBST members can also find tools and resources to help improve health and well-being by logging into BlueAccess and going to the Managing Your Health tab.

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Ashley Brantley has been writing about food, culture and health for more than a decade, and has lived in three of Tennessee’s four major cities (Memphis, Nashville and Knoxville).