If you take medication to manage arthritis or any other medical condition, you may be puzzled by how insurance providers decide what portion of the tab you must pay for your pills and other medicines. And if you’re one of a growing number of arthritis patients, you may have recently been shocked by the size of the bill you received for a much-needed drug treatment.

Almost all Americans who have health insurance pay only a portion of the cost when they need to take prescription medications: 98 percent of workers who are covered by employer-sponsored health plans have prescription-drug benefits , and retirees can get similar coverage through Medicare Part D.  However, some unlucky arthritis patients are now faced with huge costs for critical medications –even though they have insurance.

Most health insurance providers contract with third-party companies called pharmacy benefit managers (PBMs) to administer and process prescription drug claims.  PBMs set the price that a plan member must pay out of pocket for a prescription drug, a fee sometimes called “cost sharing.” The most common form of cost sharing is known as a copayment, which is a fixed price that usually represents a relatively modest portion of the drug’s actual cost. However, the size of a copayment can vary significantly.

Most PBMs set copayments using a system of three levels, or “tiers.” Although the terminology may vary from one plan to another, the typical three-tier copayment system looks like this :

  • Tier one is made up of generic drugs, which cost much less than their brand-name equivalents; that’s why they have the lowest copayments.

  • Tier two includes “preferred drugs.” These are brand-name medications that are included in a PBM’s formulary, which is a list of drugs covered by the plan. Preferred drugs cost you more than generic drugs and may also be called “approved” or “formulary” medications.

  • Tier three includes “non-preferred” drugs, which are brand-name medications not included in a PBM’s formulary. You can still take a non-preferred drug, but it will cost more than a similar preferred drug. Other names include “non-approved” or “non-formulary” drugs.

In 2011, the average drug copayments in the three-tier system were $10, $29, and $49 per month, respectively.  Why do consumers pay more for non-preferred drugs? PBMs select drugs for their formularies by several criteria, explains Enrique Seoane-Vazquez, PhD, director of the International Center for Pharmaceutical Economics and Policy at Massachusetts College of Pharmacy and Health Sciences.

For one, PBMs have expert committees that identify medications that they feel should be the first choice for given medical conditions due to their demonstrated safety and effectiveness, says Seoane-Vazquez. But economics play a critical role, too. Within a given category of drugs there may be several brand-name medications that are similar. A PBM can negotiate lower prices and rebates with the maker of one brand by agreeing to add the drug to its formulary. Those savings are passed onto consumers when their doctors prescribe preferred drugs. “Formularies are a critical tool for controlling costs,” says Seoane-Vazquez.