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

Ever filled a prescription and been shocked by the price-even though your insurance said it was covered? You’re not alone. The reason often lies in something called a formulary tier. These tiers determine how much you pay out of pocket for your meds, and they can make the difference between affording your treatment or skipping it altogether.

What Is a Formulary, Anyway?

A formulary is just a list of prescription drugs your insurance plan agrees to cover. But it’s not a simple yes-or-no list. It’s broken into tiers-like levels in a game-where each level has a different price tag for you. The goal? Encourage you to pick cheaper, equally effective drugs while still giving you access to what you need. But the system isn’t always fair or clear.

Most plans use three to five tiers. Some even have special categories for expensive specialty drugs. The exact structure depends on your plan-Medicare Part D, employer insurance, or private coverage all play by slightly different rules. But the basic idea stays the same: lower tier = lower cost. Higher tier = higher cost.

Tier 1: The Cheap and Common

Tier 1 is where you want to be. This tier is almost always made up of generic drugs that have been around for years. Think metformin for diabetes, lisinopril for high blood pressure, or atorvastatin for cholesterol. These drugs are off-patent, so lots of companies make them. That competition drives prices down.

In most commercial plans, Tier 1 copays range from $0 to $15 for a 30-day supply. Medicare Part D plans often charge even less-sometimes nothing at all. These are the drugs your insurer wants you to use because they’re safe, effective, and cheap. If your doctor prescribes a brand-name version of a drug that has a generic equivalent, your plan might not cover it unless you jump through hoops.

Bottom line: If you can switch to a Tier 1 generic, you’ll save money. Always ask your pharmacist or doctor: “Is there a generic version?”

Tier 2: Preferred Brand-Name Drugs

Tier 2 is where you find brand-name drugs that your plan still prefers-usually because they’ve negotiated a good deal with the manufacturer. These aren’t generics, but they’re cheaper than other brand-name options. Examples might include newer diabetes meds like semaglutide (Ozempic) or certain blood pressure pills that don’t have generics yet.

Costs here typically run between $20 and $40 for a 30-day supply in commercial plans. Medicare Part D labels this tier as “medium copayment.” It’s more than Tier 1, but still manageable. Insurers push these drugs because they’ve secured rebates from drugmakers. Those rebates help lower your out-of-pocket cost.

Here’s the catch: Not all brand-name drugs make it to Tier 2. If a drug is newer, more expensive, or has no rebate deal, it gets bumped up to Tier 3-even if it’s the only option for your condition.

Tier 3: Non-Preferred Brand-Name Drugs

Tier 3 is where things start to hurt. These are brand-name drugs that your plan doesn’t prefer-usually because they’re expensive, have cheaper alternatives, or the manufacturer didn’t offer a good rebate. You might be prescribed one because it’s the only one that works for you, or because your doctor isn’t aware of alternatives.

Copays here jump to $50-$100 per 30-day supply. Some plans charge coinsurance instead-a percentage of the drug’s total cost-which can mean hundreds of dollars per month. For example, a Tier 3 medication costing $300 might require you to pay 40%, or $120. That’s more than your rent in some cases.

Medicare Part D calls this tier “higher copayment.” And here’s the kicker: Even if you’ve hit your deductible, you still pay this full amount. No discounts. No exceptions-unless you appeal.

Many patients don’t realize their drug moved to Tier 3 until they get to the pharmacy. Plans can change tier assignments quarterly. One month your drug is covered at $30. The next, it’s $85. No warning. No explanation.

Tier 4 and 5: Specialty Drugs and the Cost Trap

Some plans go beyond three tiers. Tier 4 and 5 are reserved for specialty drugs-expensive, complex medications used for conditions like cancer, rheumatoid arthritis, multiple sclerosis, or rare genetic disorders. These aren’t your everyday pills. They’re often injectables, infusions, or highly specialized tablets.

Instead of a flat copay, these tiers usually charge coinsurance-25% to 50% of the drug’s full price. A single dose of a specialty drug can cost $5,000 or more. That means you could owe $1,250 to $2,500 per month. Some patients pay over $10,000 a year just for one drug.

Medicare Part D puts these in a separate “specialty tier,” but commercial plans often split them into Tier 4 and 5. Humana, for example, charges 34-50% coinsurance for Tier 5 drugs. That’s not a typo. Half the cost is yours.

And here’s the worst part: There’s often no alternative. If you have a rare disease, you might have only one FDA-approved drug. It’s on Tier 5. You can’t switch. You can’t negotiate. You’re stuck.

Non-Formulary Drugs: The No-Coverage Zone

Non-formulary drugs aren’t on your plan’s list at all. They’re completely excluded. That means your insurance won’t pay a dime. You pay 100% of the cost.

Why would a drug be non-formulary? Maybe it’s too new, too expensive, or has safety concerns. Maybe the manufacturer refused to negotiate a rebate. Or maybe your plan just decided it’s not “medically necessary” compared to other options-even if your doctor says it’s the best fit.

Getting a non-formulary drug covered is possible, but it’s a battle. You need a formal exception request. That means your doctor writes a letter explaining why you need this specific drug. Your plan reviews it. It can take days or weeks. And even then, they might say no.

Patients with chronic conditions like lupus or Crohn’s disease often hit this wall. One Reddit user shared that their $1,200/month drug was suddenly non-formulary. They had to switch to a less effective one-or pay $14,400 a year out of pocket. They chose the cheaper option. Their symptoms got worse.

Why Do Formulary Tiers Even Exist?

Formularies were created to control drug costs. In the 1980s, insurers started working with Pharmacy Benefit Managers (PBMs)-companies like CVS Caremark, Express Scripts, and OptumRx-to manage prescriptions. They negotiated discounts with drugmakers in exchange for putting certain drugs on preferred tiers.

It worked. Drug spending growth slowed. But the trade-off was complexity. Today, 97% of commercial plans and 100% of Medicare Part D plans use tiered formularies. The average plan has 4.2 tiers. That’s more than ever.

Experts agree: Tiered formularies save money-for insurers. But they don’t always save money for patients. A 2021 study in JAMA Internal Medicine found that every extra tier increases the chance you’ll skip your meds by 5.7%. For low-income people, that number is even higher.

And here’s the irony: The drugs on the highest tiers are often the ones that prevent hospitalizations. Skip your rheumatoid arthritis drug? You might end up in the ER. Skip your insulin? You could end up in the ICU. Tiered formularies save money on pills-but they can cost more in emergencies.

How to Navigate the System

You can’t control your plan’s formulary. But you can control how you respond to it.

• Check your formulary before you fill a script. Log into your plan’s website. Search your drug. See what tier it’s on. Don’t wait until the pharmacy counter.
• Ask your doctor about alternatives. “Is there a Tier 1 or Tier 2 drug that works for me?” Most doctors are happy to switch if it saves you money.
• Know the difference between copay and coinsurance. A $30 copay is predictable. 40% coinsurance on a $1,000 drug? That’s $400. Big difference.
• Request a formulary exception. If your drug moved to a higher tier or was dropped entirely, you can appeal. Your doctor fills out a form. You need to prove medical necessity. It works more often than you think.
• Use tools like Medicare’s Plan Finder or Humana’s Drug Cost Finder. These let you compare plans before you enroll. Don’t just pick the cheapest premium. Check the formulary.

One patient in Victoria, BC, saved $1,100 a month after switching from a Tier 3 drug to a Tier 1 generic. Her doctor didn’t know the generic was just as effective. She found out by checking her plan’s formulary online. That’s power.

What’s Changing in 2025?

The Inflation Reduction Act of 2022 capped insulin at $35/month for Medicare patients-no matter the tier. That’s huge. And starting in 2024, Medicare’s new catastrophic coverage phase will cap out-of-pocket spending on specialty drugs at $2,000 a year. That could save over a million people hundreds of dollars annually.

Some PBMs are testing “value-based” tiers. Instead of just pricing, they look at outcomes. Does this drug actually reduce hospital visits? If yes, it moves down a tier. It’s early, but it’s a step in the right direction.

Still, most plans won’t simplify. Five tiers are here to stay. Transparency is still poor. Only 32% of plans explain how they assign tiers. You’re left guessing.

Final Thoughts

Formulary tiers aren’t evil. They’re a tool. But like any tool, they can be used well-or abused. They help keep premiums lower. But they also create hidden costs, confusion, and sometimes, dangerous delays in care.

If you’re on a chronic medication, treat your formulary like your budget. Know what tier your drugs are on. Check every time you refill. Ask questions. Fight for exceptions. You’re not just a patient-you’re a consumer with rights.

And remember: Just because a drug is on your plan doesn’t mean it’s affordable. And just because it’s off the list doesn’t mean you’re out of options. Knowledge is your best medicine.

What to Do Next

Start by reviewing your current prescriptions. Look up each one on your plan’s formulary. If any are on Tier 3 or higher, talk to your doctor. Ask if there’s a cheaper, equally effective option. If you’re on a specialty drug, check if you qualify for patient assistance programs. Many drugmakers offer co-pay cards or free medication for low-income patients.

Don’t wait until you’re stuck at the pharmacy counter. Use the tools available. Know your rights. And if you’re overwhelmed, call the Patient Advocate Foundation-they offer free help navigating formulary issues.

Insurance isn’t designed to be simple. But you don’t have to be confused by it. With a little effort, you can take control of your costs-and your health.