Formularies and medicine benefits: how schemes decide what they cover

A formulary is a list of prescription medicines that a health insurance plan, medical scheme, or hospital has approved for use and coverage. When a patient fills a prescription, whether the scheme will pay for it—and how much the patient will pay out of pocket—depends largely on how the medicine is classified within that formulary. Health insurance providers and medical schemes use these lists to manage costs while ensuring members have access to safe, effective treatments. Understanding how formularies are compiled and how they dictate benefits can help patients anticipate costs and avoid unexpected charges at the pharmacy.

What is a formulary?

Formularies are developed by committees of doctors, pharmacists, and other health experts, commonly known as Pharmacy and Therapeutics (P&T) committees. These groups review clinical evidence to ensure that the listed medicines are safe, effective, and appropriate for the population they serve. The evaluation process often relies on health technology assessments, which weigh the clinical benefits of a medicine against its cost. If a medicine is not included on the formulary, the scheme may decline to cover it, requiring the patient to pay the full price out of pocket or ask their doctor to submit a motivation for an exception. Formularies are generally updated regularly to reflect new clinical guidelines, the availability of new generic alternatives, and emerging safety data.

Tiers and co-payments

To manage costs while still offering clinical choices, many health schemes use a tiered formulary system. Medicines are grouped into tiers based on their cost and whether generic alternatives are available. Typically, a lower tier includes generic medicines, which generally have the lowest out-of-pocket costs for the patient. A middle tier might include preferred brand-name medicines, while a higher tier is reserved for non-preferred brands or expensive specialised therapies.

The tier dictates the co-payment, which is a fixed amount or a percentage of the medicine’s cost that the patient must pay. By structuring benefits this way, schemes encourage the use of clinically equivalent but more affordable options. In some cases, formularies also use step therapy, requiring a patient to try a lower-tier, cost-effective medicine first before the scheme will cover a more expensive alternative. Prior authorisation may also be required, meaning the doctor must obtain approval from the scheme before prescribing certain high-tier medicines to confirm it is medically necessary.

Reference pricing

Another common mechanism used by health schemes is reference pricing. Under this system, the scheme sets a maximum reimbursement limit for a group of similar medicines that are used to treat the same condition. This limit is usually based on the price of the most affordable option in the group, often a generic equivalent. If a patient and their doctor choose a medicine that costs more than this reference price, the patient is responsible for paying the difference.

This approach aims to control overall healthcare expenditure while allowing patients the flexibility to choose more expensive options if they are willing to share the cost. Reference pricing can be internal (comparing prices within a single country or scheme) or international (comparing prices across different countries). In South Africa, regulated pricing frameworks like the Single Exit Price provide a transparent baseline for these calculations, ensuring that the reference price is based on a fixed, regulated maximum price for each medicine.

Prescribed Minimum Benefits in South Africa

In South Africa, medical schemes operate under specific regulations designed to protect members, one of the most important being Prescribed Minimum Benefits (PMBs). PMBs are a defined set of medical conditions—including a list of chronic diseases and emergency conditions—for which medical schemes must by law cover the diagnosis, treatment, and care, regardless of the plan type a member has chosen.

If a medicine is required to treat a PMB condition, the scheme must pay for it without imposing a co-payment, though they may still require the use of a designated service provider or a specific formulary medicine if one is available. This ensures that members have access to essential treatments without facing financial ruin. Patients and providers can use resources like HealthSA to verify the SAHPRA registration status of these medicines, ensuring that prescribed treatments are legitimate and compliant with local regulatory standards.

Navigating formulary changes

Formularies are not static; they change as new medicines enter the market, patents expire, and generic alternatives become available. When a formulary changes, a medicine that was previously covered might be moved to a higher tier or removed entirely, which can significantly affect a patient's ongoing treatment costs. Health schemes generally notify members of these changes, but patients are advised to check their scheme’s latest medicine list before filling a prescription. If a prescribed medicine is no longer covered or has moved to a higher tier, doctors and pharmacists can often work together to find a formulary alternative or submit a clinical motivation to the scheme for continued coverage.