What Is a Drug Formulary? Tiers and Coverage

Saving Money on the Cost of Prescription Drugs

A medication formulary, also known as a drug list, is a list of prescription medications that are preferred by your health plan. A formulary is comprised of prescription drugs, and it typically includes generic and brand-name drugs.

Whether a private insurance company, Medicare, Tricare, Medicaid, or another program, your payer maintains a list of drugs it will pay for. It ranks them into tiers on its formulary, with tier 1 having the lowest costs and tier 4 the highest.

If you have private insurance or government coverage for your prescriptions, familiarizing yourself with your payer's medication formulary can save you time and money.

This article will discuss what drug formulary tiers are and how drugs get ranked into the various tiers. It also explains how the drug formulary is created, where you can find your plan's drug formulary, and what to look for when choosing a health plan.

Health insurance helps patients get the medical care they require
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Formulary Tiers

A formulary generally lists many drugs and ranks them in groups described as tiers. Tier 1 drugs generally don't require pre-authorization and often will cost you little, if any, co-pay. Higher tiers may require approval from your insurance and may cost you a high co-pay.

  • Tier 1 or Tier I: Tier 1 drugs are usually limited to generic drugs, which are the lowest cost drugs. Sometimes lower-priced branded drugs will fall into this tier as well. Tier 1 drugs are generally automatically approved by your insurance and cost you the lowest co-pays that your plan offers.
  • Tier 2 or Tier II: Tier 2 is usually comprised of brand-name drugs or more expensive generics. Your payer will have a list of branded drugs it prefers, which are typically on the lower end cost-wise. Tier 2 drugs may require a pre-authorization from your insurance company.
  • Tier 3: or Tier III: The more expensive brand-name drugs cost more and are considered non-preferred. Tier 3 drugs usually require a pre-authorization, with your healthcare provider explaining to your health insurer why you need to take this particular drug instead of a cheaper option. These drugs will cost you a higher co-pay than the lower tiers.
  • Tier 4 or Tier IV, also called specialty drugs: These are usually newly approved pharmaceutical drugs that your payer wants to discourage because of their expense. Tier 4 drugs almost always require pre-authorization and evidence from your healthcare provider that you don't have a less expensive option. Your insurer may assign you a specific dollar co-pay or may require you to pay a percentage of the cost. Each insurer has its own policy regarding your rate when it comes to tier 4.

Why Drugs Are Listed in Tiers

A drug's tier listing is a function of three things: its real cost, the payer's negotiated cost, and, if available, cheaper options. The more the drug costs the payer, the higher the tier. Part of what determines the cost of the drug is the drug class.

Drug Class

A drug class describes a group of drugs that all treat the same condition. Different drugs in each drug class are listed in different tiers based on cost.

For example, the drugs that help people with gastroesophageal reflux disease (GERD) are in a class called proton pump inhibitors, or PPIs. The least expensive PPI is the generic, called omeprazole, and it is typically found listed in Tier 1. Some of the mid-priced branded PPIs, like Prevacid, are usually listed in Tier 2. The most expensive PPIs, like Aciphex or Nexium, are listed on Tier 3.

Your Payer's Negotiated Cost

A payer might negotiate a price with the manufacturer or distributor of one of the more expensive drugs to a very low point. If the payer does that successfully, that drug can become a "preferred brand," which usually means it becomes a Tier 2 drug. If it can't negotiate the price low enough, the drug will be placed in Tier 3 and will usually cost patients a higher co-pay as well.

Generic vs. Brand Name

Research studies often compare generics vs. brand-name drugs in terms of how well they work and how well they are tolerated. This data is often used by insurers to support placing high-cost drugs on a high tier if generics work just as well. Similarly, healthcare providers often use it as evidence for pre-authorization requests when they are concerned that a generic may not work as well as a brand.

How Is a Drug Formulary Created?

The drug formulary gets continuously updated as the market changes. A pharmacy and therapeutics (P&T) committee oversees and approves changes to the drug list. This committee can be made up of a range of healthcare providers including doctors, pharmacists, and nurses, as well as legal experts and administrators.

The P&T committee decides which are formulary drugs—the ones that make the list—and which are non-formulary drugs—the ones that don't get assigned a tier.

What to Do if Your Medication Isn't On Your Health Plan's Drug Formulary

If you need a non-formulary medication that the payer will not cover, you may need to revert to a formulary exception policy that shows why this non-preferred drug is necessary for your treatment.

For drugs that are on higher tiers, you can also submit a tiering exception. If approved, this exception will get a non-preferred drug moved down to a lower tier, making it available at a cheaper price.

Whether you are requesting a formulary or tiering exception, these are the steps you will follow:

  1. Contact your health insurance provider: Every insurance company has a different process for exceptions. Contact your health insurance provider for details on how this process works.
  2. Submit a statement: Either you or your prescriber can submit a statement to the sponsor of your health insurance plan. The statement explains the reason for the formulary or tiering exception. For example, the preferred drug may be less effective than the non-formulary drug or it may have adverse effects.
  3. Wait for a response: Your request will be reviewed. If the plan sponsor determines that the drug you requested is a medical necessity, it will grant your request for an exception.
  4. Appeal if denied: If your request is not approved, you can still file an appeal. If you choose to file an internal appeal, you will do this through your insurer.
    The alternative is to file an external review with a third party. In states that don't have laws governing the external review process, federal laws apply. Either way, your insurer is required to accept the external reviewer's decision.

Where Can I Find My Health Plan's Drug Formulary?

Any healthcare payer will make its formulary available to you because they want you to have it and use it—your low out-of-pocket costs usually translate to low costs for your payer. The full formulary is often available on a payer website, or you can call the customer service number and ask them to mail it to you.

Various health insurance payers don't list the same drugs on the same tiers because each payer's tier assignment depends on its negotiated cost with drug manufacturers. If Payer A can negotiate a lower price for a specific branded drug than Payer B negotiates, then Payer A may list that brand on Tier 2 while Payer B may list it on Tier 3.

It's not unusual for a payer to make changes to its formulary or to move a drug from one tier to another. If you take a drug on a daily or regular basis, you may be notified when a shift takes place. Double-check each year during open enrollment, when you have the opportunity to make changes to your coverage plan, to see if your drug has shifted its position in the payer's formulary.

Tips for Choosing a Health Plan

If you take medications regularly, it's important to make sure you've got a health insurance plan to fit your needs.

When choosing a healthcare plan, visit the provider's website to see if the drug formulary is available online. You can also call the insurance provider to see what's covered. The drug formulary may be provided in materials you get regarding your plan, like the summary of benefits and coverage.

  • Compare the medications you are taking to the those on the drug formulary of your health plan.
  • Check to see what the out-of-pocket costs would be. This will be based on the coverage level for your health plan.

Summary

A drug formulary, or drug list, is a list of prescription medications covered by health plans. This list varies from one health insurance company to the next and is continuously updated to reflect changes in the market.

If you have a basic understanding of drug classes and tier pricing, you can work with your healthcare provider to choose the drug that will cost you the least. For drugs that aren't included on the drug formulary, you can submit an exception request, explaining the medical reason you need a non-formulary drug.

Review the prescription class, and find your medication's position in your payer's formulary to make sure you are getting the drug you need for the least amount of out-of-pocket cost to you. Talk to your prescriber or health insurance company if you need help getting a prescription drug that isn't covered by your plan.

11 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. HealthCare.gov. Formulary.

  2. Patient Advocate Foundation. Understanding drug tiers.

  3. BCBS of Michigan. The burning truth about proton pump inhibitors.

  4. Werble C. Formularies. Health Affairs. 2017. doi:10.1377/hpb20171409.000177

  5. Hein K. Brand name vs. generic drugs: Understanding the difference. Northwest Family Clinics. 2018.

  6. Academy of Managed Care Pharmacy. Formulary management.

  7. Centers for Medicare & Medicaid Services. Prescription drug appeals & grievances: Exceptions.

  8. U.S. Department of Health & Human Services. Getting prescription medications.

  9. U.S. Department of Health & Human Services. Appealing a health plan decision: Internal appeals.

  10. U.S. Department of Health & Human Services. Appealing a health plan decision: External review.

  11. Patient Advocate Foundation. Can my drug formulary change?

Additional Reading

By Trisha Torrey
 Trisha Torrey is a patient empowerment and advocacy consultant. She has written several books about patient advocacy and how to best navigate the healthcare system.