Insurance Formulary Tiers Explained: Tier 1, Tier 2, Tier 3, and Non-Formulary Drugs

When you pick up a prescription, you expect to pay a certain amount. But sometimes, the cost surprises you-way more than you thought. Why? It’s not the pharmacy’s fault. It’s because of your insurance’s formulary tiers. These tiers decide how much you pay out of pocket for each drug. Understanding them isn’t just helpful-it can save you hundreds or even thousands of dollars a year.

What Is a Formulary, Anyway?

A formulary is your health plan’s official list of covered prescription drugs. Think of it like a menu: not every medication is available, and the ones that are come with different price tags. Insurance companies, working with Pharmacy Benefit Managers (PBMs) like CVS Caremark, Express Scripts, and OptumRx, create these lists to control costs while still giving you access to necessary medicines.

Formularies aren’t static. They change quarterly. A drug you paid $10 for last year might jump to $75 this year-no warning, no explanation. That’s why checking your plan’s formulary before filling a prescription is critical.

Tier 1: The Lowest Cost Option

Tier 1 is where you want to be. This tier is almost always made up of generic drugs-medications that have the same active ingredients as brand-name drugs but cost far less. Generic versions of common prescriptions like lisinopril (for blood pressure), metformin (for diabetes), and atorvastatin (for cholesterol) live here.

In most commercial plans, Tier 1 copays range from $0 to $15 for a 30-day supply. For Medicare Part D beneficiaries, the average out-of-pocket cost in 2022 was just $1.27 per prescription. That’s not a typo. It’s less than the cost of a coffee.

Why are generics so cheap? Because they don’t carry the research and marketing costs of brand-name drugs. Once a patent expires, multiple companies can make the same drug, driving prices down through competition. Insurance plans love Tier 1 drugs because they save money-and they pass those savings to you.

Tier 2: Preferred Brand-Name Drugs

Tier 2 includes brand-name drugs that your plan has negotiated lower prices for. These aren’t generics, but they’re still considered cost-effective compared to other brand-name options. Think of drugs like Humira, Lipitor, or Advair-brands that have been on the market for years and have generic alternatives available, but still have strong clinical evidence supporting their use.

Copays here typically range from $20 to $40 in commercial plans. Medicare Part D calls this tier “medium copayment” for preferred brand-name drugs. The key word here is preferred. Your plan chose this drug over others in the same class because it either works better, has fewer side effects, or the manufacturer gave the PBM a big rebate.

But here’s the catch: not all brand-name drugs are created equal. Two drugs treating the same condition-say, high blood pressure-can be in different tiers. One might be Tier 2, another Tier 3. Why? It’s not about medical effectiveness. It’s about money. The drug with the bigger rebate wins.

Tier 3: Non-Preferred Brand-Name Drugs

Tier 3 is where things get expensive. These are brand-name drugs with no generic alternative-or where a cheaper generic or preferred brand exists, but your doctor still prescribed this one. Examples include newer medications like Ozempic (for diabetes and weight loss) or Xarelto (a blood thinner), when a cheaper alternative is available.

Copays here jump to $50-$100 for a 30-day supply. Some plans use coinsurance instead-meaning you pay 30% or 40% of the drug’s full price. That can mean $200 or more per month for a single prescription.

This tier is where patients get hit hardest. Many don’t realize their drug moved to Tier 3 until they’re at the pharmacy counter. A 2022 survey found that 58% of people paid more than expected because their medication was placed in a higher tier than they assumed.

Tier 4 and 5: Specialty Drugs

Not all plans have five tiers, but most employer-sponsored plans do. Tier 4 and 5 are reserved for specialty drugs-medications that treat complex, chronic conditions like cancer, multiple sclerosis, rheumatoid arthritis, or rare genetic disorders.

These drugs often cost thousands of dollars per month. They may require special handling (like refrigeration), injection by a nurse, or close monitoring. Examples include Enbrel, Kalydeco, or Zolgensma.

In Tier 4, you typically pay 25-33% coinsurance. In Tier 5, it’s 34-50%. That means if your drug costs $10,000 a month, you could owe $5,000 out of pocket. That’s not a typo.

Medicare Part D has a separate specialty tier, but commercial plans often lump them into Tier 4 or 5. The difference matters because Medicare’s catastrophic coverage phase (starting in 2024) caps your out-of-pocket spending on these drugs. Commercial plans don’t always offer the same protection.

Non-Formulary: Not Covered at All

Non-formulary drugs aren’t just expensive-they’re not covered. Your insurance won’t pay a penny. You pay 100% of the cost, which can be $500, $1,000, or more per month.

Why would a drug be non-formulary? Three reasons:

• It’s too new and hasn’t been reviewed yet.
• There’s a cheaper, equally effective alternative on the formulary.
• The manufacturer didn’t negotiate a rebate with your PBM.

If your doctor prescribes a non-formulary drug, you have two options: pay full price or file a formulary exception request. This is a formal appeal asking your plan to cover the drug anyway. You’ll need a letter from your doctor explaining why the formulary alternatives won’t work for you. The process takes about 7-10 business days. In 2022, the Medicare Rights Center reported that 62% of these appeals were approved when supported by strong medical documentation.

Why Do Tiers Even Exist?

You might wonder: why make this so complicated? Why not just cover everything at one price?

The answer is cost control. In 2022, U.S. prescription drug spending hit $621 billion. Without tiered formularies, premiums would be unaffordable for most people. By steering patients toward cheaper drugs, insurers save money-and they pass some of those savings to you in lower monthly premiums.

But here’s the trade-off: complexity. A 2022 Harvard study found that 61% of patients couldn’t accurately predict their out-of-pocket cost before filling a prescription. People assume their brand-name drug is covered at the same rate as their last one. It’s not. Tier assignments change. New drugs get added. Rebates shift. And no one tells you until you’re at the counter.

How to Navigate the System

You don’t have to guess. Here’s how to take control:

1. Get your plan’s formulary document. It’s usually online in your member portal. Look for “Drug List” or “Formulary.”
2. Search for your medication. Note the tier and whether it’s preferred or non-preferred.
3. Check if there’s a generic alternative. Ask your pharmacist or doctor.
4. Use your plan’s cost calculator. Humana, UnitedHealthcare, and Medicare.gov have tools that show estimated costs.
5. If a drug is non-formulary or in a high tier, ask your doctor for a prior authorization or exception request.

Don’t wait until you’re at the pharmacy. Do this before your prescription is even written.

What’s Changing in 2025?

The Inflation Reduction Act of 2022 changed the game for Medicare beneficiaries. Insulin is now capped at $35 per month-no matter the tier. Starting in 2024, the catastrophic coverage phase kicks in, limiting your out-of-pocket spending on specialty drugs to $2,000 annually. That’s a huge win for people on Tier 4 and 5 drugs.

Commercial plans are catching up slowly. Some PBMs are testing “value-based tiering,” where drugs are placed based on real-world outcomes-not just price. For example, a drug that reduces hospital visits might be moved to a lower tier, even if it’s expensive upfront.

By 2025, analysts predict 45% of commercial plans will use this approach. It’s still early, but it could mean fewer surprises and better health outcomes.

When Tiers Fail You

Tiers work well for common conditions like high blood pressure or diabetes. But they break down for rare diseases. If you have a condition like Duchenne muscular dystrophy or cystic fibrosis, you might have only one FDA-approved drug. It’s not a choice-it’s your only option. And it’s almost always in Tier 5.

A 2022 survey by the Patient Advocate Foundation found that 41% of patients delayed or skipped doses because they couldn’t afford their Tier 4 or 5 medications. That’s not just expensive-it’s dangerous.

That’s why knowing your rights matters. You can appeal. You can get help from nonprofit groups like the Patient Advocate Foundation, which assists 15,000 patients monthly with formulary issues. You can also call 1-800-MEDICARE for free guidance.

Bottom Line

Insurance formulary tiers aren’t designed to confuse you. But they’re complicated by design. The system saves money for insurers and, in many cases, lowers your premiums. But it also puts you in charge of figuring out what you’ll pay-and when.

Your best defense? Know your formulary. Ask questions. Don’t assume. And if a drug is too expensive or not covered, fight for it. You’re not just a patient-you’re a consumer with rights.