What Is a Health Insurer's Drug Formulary and Tier Pricing?

Saving money on the cost of prescription drugs

Health insurance helps patients get the medical care they require
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A medication formulary is a list of prescription medications that are preferred by your health plan. If you have private insurance or government coverage for your prescriptions, familiarizing yourself with your payer's medication formulary can save you time and money. A formulary is comprised of prescription drugs, and it typically includes generic and brand name drugs as well.

Whether your payer is a private insurance company, Medicare, Tricare, Medicaid or another program, they maintain a list of drugs they will pay for, and they rank them on their formulary based on which they prefer you use.

Formulary Tiers

A formulary generally lists many drugs and ranks them in groups described as tiers. Tier 1 drugs generally don't require pre-authorization and often will cost you little, if any, co-pay. Higher tiers may require approval from your insurance and may cost you a high co-pay.

  • Tier 1 or Tier I: Tier 1 drugs are usually limited to generic drugs, which are the lowest cost drugs. Sometimes lower price branded drugs will fall into this tier as well. Tier I drugs are generally automatically approved by your insurance and cost you the lowest co-pays that your plan offers, usually ranging from nothing at all to $25.
  • Tier 2 or Tier II: Tier II is usually comprised of brand-name drugs or more expensive generics. Your payer will have a list of branded drugs it prefers, which are typically on the lower end cost-wise. Tier II drugs may require a pre-authorization from your insurance company, and will usually cost you a moderate co-pay of $15 to $50.
  • Tier 3: or Tier III: The more expensive brand-name drugs cost more and are considered non-preferred. Tier III drugs usually require a pre-authorization, with your doctor explaining to your health insurer why you need to take this particular drug instead of a cheaper option. These drugs will cost you a higher co-pay than the lower tiers, usually $25 to $150.
  • Tier 4 or Tier IV, also called specialty drugs: These are usually newly approved pharmaceutical drugs that your payer wants to discourage because of their expense. Tier IV is a newer designation, first used in 2009. These drugs almost always require a pre-authorization, and evidence from your doctor that you don't have any less expensive option. Your insurer may assign you a specific dollar co-pay, or they may require you to pay a percentage of the cost, ranging from 10 to 60 percent. For example, a very expensive chemotherapeutic drug, priced at $1,400 per month may cost you $600 per month. Each insurer has their own policy regarding your rate when it comes to tier 4.

Why Drugs Are Listed in Tiers

A drug's tier listing is a function of three things: its real cost, the payer's negotiated cost, and whether there are cheaper options. The more the drug costs the payer, the higher the tier. But tiers are also based on drug class.

Drug Class

A drug class describes a group of drugs that all treat the same condition. Different drugs in each drug class are listed in different tiers based on cost. For example, the class of drugs that help people with GERD (gastroesophageal reflux disease) is called proton pump inhibitors, or PPIs. The least expensive PPI is the generic, called omeprazole, and it is typically found listed in Tier I. Some of the mid-priced branded PPIs, like Prilosec or Prevacid, are usually listed in Tier II. The most expensive PPIs, like Aciphex or Nexium, are listed on Tier III.

Your Payer's Negotiated Cost

A payer might negotiate a price with the manufacturer or distributor of one of the more expensive drugs, like Aciphex or Nexium, to a very low point. If they do that successfully, that drug can become a "preferred brand," which usually means it becomes a Tier II drug. If they can't negotiate it low enough, it will be placed in Tier III and it will usually cost patients a higher co-pay as well.

Generic vs. Brand

Research studies often compare generics vs. brand name drugs in terms of how well they work and how well they are tolerated. This data is often used by insurers to support placing high-cost drugs on a high tier if generics work just as well. Similarly, doctors often use it as evidence for pre-authorization requests when they are concerned that a generic may not work as well as a brand.

Finding Your Health Insurer's Formulary

Any healthcare payer will make its formulary available to you because they want you to have it and use it—your low out-of-pocket costs usually translate to low costs for your payer. The full formulary is often available on a payer website, or you can call the customer service number and ask them to mail it to you.

Various health insurance payers don't list the same drugs on the same tiers because each payer's tier assignment depends on its negotiated cost with drug manufacturers. If Payer A can negotiate a lower price for a specific branded drug than Payer B negotiates, then Payer A may list that brand on Tier II while Payer B may list it on Tier III.

It's not unusual for a payer to make changes to its formulary or to move a drug from one tier to another. If you take a drug on a daily or regular basis, you may be notified when a shift takes place. You'll want to double-check each year during open enrollment, when you have the opportunity to make changes to your coverage plan, to see if your drug has shifted its position in the payer's formulary.

A Word From Verywell

If you have a basic understanding of drug classes and tier pricing, you can work with your doctor to choose the drug that will cost you the least. Review the prescription class, and find your medication's position in your payer's formulary to make sure you are getting the drug you need for the least amount of out-of-pocket cost to you.

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