Formulary Tier

How It Works

Most Medicare Part D plans use a 5-tier formulary structure standardized by CMS: Tier 1 preferred generics ($0-5 copay typical), Tier 2 non-preferred generics ($10-20), Tier 3 preferred brands ($40-47), Tier 4 non-preferred drugs (often 40-50% coinsurance), and Tier 5 specialty ($830+ monthly negotiated price, typically 25-33% coinsurance). Some plans add a Tier 6 select care (select generics for chronic conditions at $0). Commercial plans vary more, typically 3-5 tiers, and ACA marketplace silver-tier plans must disclose tier structure per the 2022 Transparency in Coverage rule. Tier placement is negotiated: a brand with 55% rebate on $500 WAC lands on Tier 3 preferred over a competitor with 30% rebate on $450 WAC, because the net price to the plan is lower despite higher list. This is why Eliquis historically landed on preferred tiers over warfarin-alternative competitors. Tier exceptions are granted when a prescriber documents medical necessity, typically intolerance or failure on preferred alternatives. The 2025 Part D redesign does not change tier structure but eliminates the catastrophic coinsurance, so Tier 5 specialty drugs no longer create unlimited exposure above the OOP cap. Specialty tier drugs are exempt from the $35 insulin cap and from the $0 vaccine rule introduced in 2023 under the IRA.

Related Terms

• Formulary, A list of prescription drugs covered by an insurance plan, organized into tiers that determine how much the patient pays for each drug.
• Out-of-Pocket Cost, The amount a patient pays directly for a prescription drug, including copays, coinsurance, and deductible payments.
• Pharmacy Benefit Manager (PBM), A company that acts as a middleman between drug manufacturers, insurers, and pharmacies, negotiating drug prices, managing formularies, and processing claims.
• Prior Authorization, A requirement by an insurer that a patient's doctor must get approval before the plan will cover a specific drug, used to control costs and ensure appropriate use.