How Formulary Status Affects Claim Responses and Reimbursement

By Misty Royse, Director of Sales, Net-Rx

Have you ever wondered why payers will reject some prescription claims, adjudicate others with profits, or reimburse some claims with a loss? The answer may lie with whether the medication’s NDC (National Drug Code) is on the prescription drug formulary list.  If the medication is included on the formulary list, what tier is it on and is it a preferred medication? The answer may affect pharmacy reimbursement, claim adjudication, and patient copay assignments.

A prescription drug formulary is a list of prescription drugs covered by a prescription drug plan or another insurance plan offering prescription drug benefits¹. Formularies are commonly used by pharmacy benefit managers (PBMs) and health plans to determine medication coverage, patient cost-sharing, and pharmacy reimbursement. Within a formulary, there is typically a preferred list and a non-preferred list. NDCs are categorized into these tiers based on how much the payer will cover for that medication which can directly affect reimbursement, patient copays, and pharmacy profitability.

Let’s take a closer look at how formulary status influences pharmacy claims processing and the factors that may cause a prescription claim to reject, adjudicate with profits, or adjudicate with losses.

Formulary/Preferred

Tier 1: Most generic NDCs are considered preferred. Prescription claims will adjudicate when a preferred formulary NDC has been used, barring other factors that may cause the claim to reject. Patient copays are the lowest in Tier 1.²

Tier 2: Preferred brand NDCs fall within this category. Preferred brand reimbursements will reflect contract rates barring any other factors that could reduce reimbursement. Patient copays in this tier are generally higher than those in Tier 1.³

If a claim adjudicates, but the reimbursement rate is higher than expected, and your profits are lower than expected, it may be because the medication’s NDC is included on the payer’s formulary but has been assigned to a non-preferred tier. Understanding formulary tier placement can help pharmacies identify reimbursement issues before they negatively affect profitability.

Net-Rx™ is a provider of pharmacy reimbursement solutions exclusively for pharmacies. Our advanced pharmacy business analytics platform, Metric-Rx^®, combines multiple data sources to reveal key performance indicators such as reimbursement, profitability, utilization, and trends. The Metric-Rx Claim Detail Dashboard helps identify prescription claims that have been reimbursed below the contracted rate due to formulary tier level concerns.  

Formulary/Non-preferred:

Tier 2: Many non-preferred generic NDCs are categorized in this tier and could result in low profits or losses. Patient copays are typically higher than Formulary Preferred Tier 1³. Because these medications are classified as non-preferred, pharmacies may also experience lower reimbursement and reduced profit margins, depending on the payer and plan design.

Tier 3: Some non-preferred generic, most non-preferred brands, and some preferred brand NDCs are placed in Tier 3. Newer NDCs, and NDCs with alternate NDCs in a lower tier may also fall into this category also.  Claim reimbursements for non-preferred NDCs will likely adjudicate with losses. Preferred brand claim reimbursements could result in low profits. Patient copays are generally higher than Tier 1 and Tier 2. ³ Monitoring formulary tier placement can help pharmacies better understand reimbursement trends and identify claims that may negatively impact profitability.

Tier 4: Some specialty non-preferred brands, preferred brands, and non-preferred generic NDCs are categorized in Tier 4. NDCs used for treating rare medical conditions fall within this tier and usually cost the pharmacy more than other NDCs. Patient copays are typically the highest within this tier with variable claim profits. ³

In addition to Metric-Rx, Net-Rx has an enhanced claims editing service, EditRx, that uses proprietary analytics along with the support of a pharmacy reimbursement-trained analyst to detect under-reimbursed claims.

The EditRx BG-Reimbursement & Utilization report helps to identify when a claim was incorrectly paid at the generic rate instead of at the brand rate, which may indicate that a non-preferred NDC has been utilized. This insight can help pharmacies identify reimbursement discrepancies and recover revenue opportunities that might otherwise go unnoticed.

The EditRx Low Margin report identifies claims in which a non-preferred or a lower-tier covered NDC was used, resulting in reduced reimbursement. By highlighting these low-margin prescription claims, the report helps pharmacies evaluate dispensing decisions, monitor reimbursement performance, and identify opportunities to improve profitability.

Non-formulary: Whenever you use an NDC that is not on the payer’s formulary list, the NDC is considered non-formulary and the claim may be rejected. Payers will often refer the pharmacy to the preferred formulary NDC list.

Having a good understanding of formulary preferred NDCs vs. formulary non-preferred NDCs is integral to maximizing your claim reimbursements. Armed with this knowledge you’ll be able to keep a closer eye on your bottom line by quickly catching claims submitted with non-preferred (higher tier) NDCs.

Next Article: Tips for Managing Transition Fills & Prior Authorizations to Save Pharmacies Time and Money

References:

1.  https://www.healthcare.gov/glossary/formulary/

2.  https://www.medicare.gov/Pubs/pdf/11136-Pharmacies-Formularies-Coverage-Rules.pdf

3.  https://www.medicare.gov/health-drug-plans/part-d/what-drug-plans-cover/how-drug-plans-work

4.  https://www.net-rx.com/

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