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

Most people don’t realize how much their prescription costs depend on something they’ve never heard of: insurance formulary tiers. It’s not just about whether your drug is covered-it’s about which tier it’s in. And that one detail can mean the difference between paying $10 or $200 for the same pill.

What Is a Formulary, Anyway?

A formulary is simply the list of prescription drugs your health plan agrees to cover. But it’s not just a simple checklist. It’s broken into tiers-like levels in a game-each with its own price tag. The goal? To nudge you toward cheaper, equally effective drugs while still giving you access to what you need.

Most plans use three to five tiers. Some use two. A few even have special tiers for expensive specialty drugs. The exact structure depends on your insurer, but the basic logic is the same: lower tiers = lower cost. Higher tiers = higher cost. And then there’s the last level: non-formulary, where your drug isn’t covered at all.

Tier 1: The Cheap and Common

Tier 1 is where you want to be. This tier is almost always filled with generic drugs. These are copies of brand-name medications that have lost their patent protection. They work the same way. They’re just cheaper.

In most commercial plans, Tier 1 copays range from $0 to $15 for a 30-day supply. For Medicare Part D beneficiaries, it’s often $0 or $5. That’s right-you might pay nothing. Insurers love Tier 1 because generics cost 80-90% less than brand names. And since they’re just as effective, there’s no reason not to use them.

Examples: Metformin for diabetes, Lisinopril for high blood pressure, Atorvastatin for cholesterol. These are the workhorses of medicine. If your doctor prescribes one of these, you’re in the sweet spot.

Tier 2: The Preferred Brands

Tier 2 is where you find brand-name drugs that your plan has chosen to favor. These aren’t generics. They’re the original versions made by the company that invented them. But they’re still considered cost-effective enough to be included at a lower price than other brands.

Copays here typically run $20 to $40 for a 30-day supply in commercial plans. Medicare Part D calls this the “medium copayment” tier. Why are these drugs in Tier 2? Usually because the manufacturer gave the insurer a big discount-or rebate-to get them placed here.

Examples: Brand-name versions of blood pressure or antidepressant drugs that still have no generic available. Or generics that are slightly more expensive than the cheapest option, but still considered a good value.

Here’s the catch: Just because a drug is in Tier 2 doesn’t mean it’s the cheapest option. Sometimes a generic exists, but your plan didn’t put it in Tier 1. That’s why you need to check the formulary list before filling a prescription.

Tier 3: The Expensive Brands

Tier 3 is where things start to hurt. These are brand-name drugs that your plan doesn’t prefer. Maybe there’s a cheaper alternative out there. Maybe the manufacturer didn’t offer a good enough rebate. Or maybe the drug is newer and hasn’t been tested for cost-effectiveness yet.

Copays for Tier 3 drugs? Usually $50 to $100. Some plans charge even more. For Medicare Part D, this is labeled the “higher copayment” tier. These are the drugs that make people skip doses or switch to cheaper ones-even if it’s not ideal.

Examples: Newer diabetes medications like Ozempic (semaglutide) or newer antidepressants that have no generic version yet. Or drugs like Singulair (montelukast), which still has brand-name pricing despite being widely used.

If you’re on a Tier 3 drug and it’s essential, you might be able to get it moved down. Your doctor can file a formulary exception. That’s a formal request asking the insurer to cover it at a lower tier because there’s no safe or effective alternative. About 40% of these requests are approved, according to the Medicare Rights Center.

Tier 4 and 5: The Specialty Drugs

Not all plans have these, but most employer-sponsored and Medicare Part D plans do. These are for high-cost, complex medications-often used for cancer, autoimmune diseases, or rare conditions. These aren’t pills you pick up at your local pharmacy. They’re injectables, infusions, or special oral drugs that require handling and monitoring.

Tier 4 usually means coinsurance-not a flat copay. That means you pay a percentage of the total cost. Think 25% to 33%. If your drug costs $5,000 a month, you’re paying $1,250 to $1,650. Tier 5 is even worse: 34% to 50%. Some specialty drugs cost over $10,000 a month. That’s $5,000 out of pocket.

Examples: Humira for rheumatoid arthritis, Keytruda for melanoma, Spinraza for spinal muscular atrophy. These are miracle drugs. But they’re also financial nightmares.

The good news? The Inflation Reduction Act of 2022 capped insulin at $35 a month for Medicare patients-no matter the tier. Some states are doing similar things for other drugs. And starting in 2024, Medicare’s new catastrophic coverage phase kicks in, which will lower costs for people hitting the high-tier spending cap.

Non-Formulary: The No-Go Zone

This is the land where your drug isn’t covered at all. No copay. No coinsurance. Just full price. And that price? It can be astronomical.

Drugs land here for a few reasons: They’re too new, too expensive, or there’s no clinical evidence they’re better than cheaper options. Sometimes, it’s just because the manufacturer didn’t negotiate with your insurer.

Examples: A brand-name antibiotic that’s been around for 20 years but never got added to the formulary. Or a new migraine drug that costs $800 a month and your plan says, “We have two cheaper options.”

If your drug is non-formulary, you have two choices: Pay full price, or get your doctor to file a formulary exception. Some plans will approve exceptions if you prove the drug is medically necessary and alternatives won’t work. But it’s not guaranteed.

Why Do Tiers Change Without Warning?

You might fill your prescription for $30 one month, then get hit with $80 the next. That’s because formularies aren’t set in stone. Insurers can change them quarterly. And they often do.

A drug might get moved up a tier if a cheaper generic becomes available. Or if the manufacturer stops offering rebates. Or if the insurer signs a new deal with another drugmaker.

According to KFF, 43% of commercial plan members had at least one drug moved to a higher tier in 2022. And most got no notice. That’s why you should check your formulary every time you refill a prescription-especially if you’re on a chronic condition medication.

How to Find Your Drug’s Tier

Don’t guess. Don’t ask the pharmacist. Don’t assume. Go straight to the source.

1. Log into your insurer’s website. Look for “Formulary” or “Drug List.”
2. Search for your medication by name.
3. Check the tier and whether it’s a copay or coinsurance.
4. Look for alternatives in lower tiers.
Medicare beneficiaries can use the official Plan Finder tool at Medicare.gov. Commercial plan members can often use apps like GoodRx or Express Scripts’ Drug Cost Finder. These tools show you real-time pricing across pharmacies.

Pro tip: Always ask your pharmacist, “Is this covered under my plan?” before you pay. They can check the formulary in real time and sometimes suggest a cheaper alternative on the spot.

What to Do If Your Drug Is Too Expensive

You’re not stuck. Here’s what works:

• Ask for a generic. If one exists, switch to it. It’s almost always cheaper.
• Ask your doctor for a tier 1 or 2 alternative. Sometimes, a different drug in the same class works just as well.
• File a formulary exception. Your doctor writes a letter explaining why you need this drug and why others won’t work. Many plans approve these.
• Use patient assistance programs. Drugmakers often have discounts or free drug programs for low-income patients.
• Compare cash prices. Sometimes, paying cash at Walmart or Costco is cheaper than your insurance copay.

Why This System Is So Confusing

You’re not dumb. The system is broken.

Only 32% of health plans explain why a drug is in a certain tier. The rest? They just list it. You have to dig through 100-page PDFs to find answers.

A 2022 Harvard study found 61% of patients couldn’t predict their out-of-pocket cost before filling a prescription. That’s not transparency. That’s a gamble.

And it’s not just you. A Patient Advocate Foundation survey showed 58% of people paid more than expected because their drug was in a higher tier than they thought.

The truth? Formularies were designed to save money. But they’ve become a maze that punishes the people who need help the most.

The Bigger Picture

The U.S. spends more on prescription drugs than any other country. Formularies are one reason why. They shift costs to patients. They create barriers. They force people to choose between medicine and rent.

But they’re not going away. PBMs (Pharmacy Benefit Managers) like CVS Caremark and Express Scripts control 85% of formulary decisions. They negotiate rebates with drugmakers. And they get paid based on how much they save insurers. That’s why they push for more tiers and more restrictions.

The only real solution? More transparency. Simpler tiers. And rules that stop insurers from changing formularies mid-year without notice.

Until then, your best weapon is knowledge. Know your tier. Know your alternatives. Know your rights.

What’s Changing in 2025?

By 2025, more plans will start using “value-based tiering.” That means drugs won’t just be ranked by price-they’ll be ranked by how well they work. A drug that keeps people out of the hospital might get moved to a lower tier, even if it’s expensive.

Also, state drug affordability boards are starting to review formularies. California, Colorado, and Washington are already doing it. More states will follow.

And Medicare’s new $2,000 out-of-pocket cap for Part D (starting in 2025) will change everything. People on high-tier drugs will finally get relief.

But until then? Stay informed. Check your formulary. Ask questions. Don’t let your health be a game of chance.