Formulary Tiers Explained
ACMA
Sep 16, 2026
5 minutes read
Formulary Tiers Explained
Within pharmacy settings, copays can be a confusing topic, as they differ among people with different medications. Behind it, there are many terms and inner workings that cause drugs to be of different prices. A drug formulary is a list of medications that a healthcare system, health plan, or hospital covers for use. It is known as the “preferred medication list.” It is based on safety, efficacy, and cost of the drug. Formularies are a major part of market access and directly impact you, as the user of these medications.
Formulary tiers determine how much a patient pays for a medication and can be dictated by a health plan. A typical tier structure is tier 1 being generic drugs, tier 2 being preferred brand-name drugs, tier 3 being non-preferred brand-name drugs, and tier 4+ being specialty/high-cost medications (Hydery 2024). As the tiers go higher, the cost of the drug and copayment is higher. Formulary tiers are decided by the health plan or PBM (pharmacy benefit manager) with input from its Pharmacy & Therapeutics (P&T) committee. P&T committees discuss factors like clinical efficacy and safety, cost, and budget.
It is common when two drugs in the same class with similar clinical efficacy and safety can land on different tiers. A major reason for this is rebates (partial refund or return of money after you buy something) and negotiated pricing with manufacturers (the pharma company that makes the drug) and the health plan/PBM. It does not mean that a certain drug is better than the other. The economic value and price is more critical here when deciding its formulary placement rather than clinical guidelines. This can directly impact your cost and access to that drug.
Remember: the higher the tier, the higher the patient’s out-of-pocket cost. Certain plans may have fixed copayments. For instance, tier 1 for generics may cost $10, while tier 2 for brands cost $30. This may not be the structure for all insurance plans, as some may use coinsurance, when a patient pays a percentage of the drug’s cost. For example, for a tier 2 drug, you may pay 20% coinsurance while for a tier 3 drug, you may pay 40% coinsurance (Hammond 2026).
Tier Level
| Tier Level | Typical Drug Type | Typical Patient Cost Share |
|---|---|---|
| Tier 1 | Generic drugs | $ Lowest copay/coinsurance |
| Tier 2 | Preferred brand-name drugs | $$ Moderate pay |
| Tier 3 | Non-preferred brand name drugs | $$$ Higher pay |
| Tier 4 | Specialty/high-cost drugs | $$$$ Highest pay and may require prior authorization |
Table 1. Formulary Tier Comparison
Tier placement can change during a new plan year when the health plan updates/renews its formulary. Changes can occur due to changes in rebates/pricing, changes in guidelines, or other generic or newer drugs entering the market (AMCP 2024). You may be paying the same copayment for months to years; however, it may become a higher cost at the start of a new plan year because the drug was moved to a different tier.
Now, the main question: what can you do as a patient experiencing these changes on a first-hand level?
- First, you can ask your insurer for the formulary list to see what tier your medication is on, which can explain higher copayments.
- You can also ask about lower-tier alternatives in the same therapeutic class. These switches can be made by your prescriber.
- Exceptions can also be made if the higher-tier drug is medically necessary and other alternatives aren’t appropriate.
Overall, tiers do not indicate clinical superiority. A higher-tier drug is not more effective or safer than a lower-tier drug. Tiers operate more as a cost-management tool, as they can reflect clinical evidence, negotiated pricing, and cost to your health plan. You have options if your medication is unaffordable, as your health matters most.
References
Hammond J. PBM 101: What They Are and How They Affect Drug Prices. Paragon Health
Institute. January 2026. https://paragoninstitute.org/private-health/pbm-101-what-they-are-and-how-they-affect-drug-prices/
Regulation of Prescription Drug Pricing. Academy of Managed Care Pharmacy. December 2024.
https://www.amcp.org/legislative-regulatory-position/regulation-prescription-drug-pricing
Hydery T., Reddy V. A primer on formulary structures and strategies. Journal of managed
care & specialty pharmacy. February 2024.;30(2):206-210.
