Insurance Formulary Tiers Explained: Tier 1, 2, 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 decide how much you pay out of pocket for your meds, and they’re not always obvious until you’re at the pharmacy counter. Understanding how Tier 1, Tier 2, Tier 3, and non-formulary drugs work can save you hundreds - or even thousands - of dollars a year.

What Is a Formulary, Really?

A formulary is just a list of 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. The goal? Encourage you to pick cheaper, equally effective drugs - and save money for both you and your insurer.

Most plans use three or four tiers. Some, especially for big employers or Medicare Part D, use five. The higher the tier, the more you pay. It’s not random. Drugs are placed based on cost, how well they work, whether a generic version exists, and how much the drugmaker pays the insurer in rebates.

Tier 1: The Cheapest Option - Usually Generics

Tier 1 is where you want to be. This tier is mostly made up of generic drugs - the same active ingredients as brand names, but without the marketing costs. Think metformin for diabetes, lisinopril for high blood pressure, or atorvastatin for cholesterol.

In commercial plans, you’ll typically pay $0 to $15 for a 30-day supply. Medicare Part D plans list Tier 1 as the lowest copayment tier, and for many seniors, that means $5 or less per prescription.

The kicker? These drugs are usually the first choice for doctors because they’re proven, safe, and dirt cheap. If your doctor prescribes something brand new, ask: “Is there a generic in Tier 1 that works just as well?” You’d be surprised how often the answer is yes.

Tier 2: Preferred Brand-Name Drugs

Tier 2 is where you’ll find brand-name drugs that your insurer has negotiated a good deal on. These aren’t generics, but the drugmaker agreed to give the plan a big discount - so you get a break too.

Copays here usually range from $20 to $40 for a 30-day supply. Examples include popular meds like Synthroid (thyroid), Crestor (cholesterol), or Humira (for autoimmune conditions) - if your plan has negotiated a preferred rate.

This tier is tricky because it’s not always clear why a drug is in Tier 2 instead of Tier 3. One plan might put Humira in Tier 2 because they got a rebate. Another plan might put it in Tier 3 because they didn’t. That’s why you can’t assume your friend’s plan works like yours.

Tier 3: Non-Preferred Brand-Name Drugs - The Costly Middle Ground

Tier 3 is where things get expensive. These are brand-name drugs with no generic alternative - or ones the insurer doesn’t have a good deal on. They’re still covered, but you’re paying more for the privilege.

Copays here jump to $50-$100 per 30-day supply. For some drugs, like certain cancer treatments or rare disease meds, you might pay even more. A 2022 CMS report showed that Medicare beneficiaries paid an average of $58.72 per Tier 3 prescription - nearly 50 times more than Tier 1.

Doctors often prescribe Tier 3 drugs because they’re the only option for a condition. But before you accept it, ask: “Is there a Tier 2 alternative?” Or better yet: “Can I get an exception?” Many plans allow you to appeal if a Tier 3 drug is medically necessary and no cheaper option works.

Tier 4 and 5: Specialty Drugs - The Real Cost Shockers

Some plans add Tier 4 and Tier 5. These are for high-cost specialty drugs - things like biologics for rheumatoid arthritis, gene therapies, or treatments for rare diseases like cystic fibrosis or spinal muscular atrophy.

Here, you don’t pay a flat copay. You pay coinsurance - a percentage of the drug’s total cost. That could be 25%, 33%, or even up to 50%. A drug that costs $10,000 a month could leave you with a $5,000 bill.

Medicare Part D has a special structure for these drugs, but commercial plans often lump them into Tier 4 or 5. The Patient Advocate Foundation found that 41% of patients delay or skip these meds because of the cost.

What’s Non-Formulary? Not Covered - Unless You Fight

Non-formulary drugs aren’t on your plan’s list at all. That doesn’t mean they’re unsafe. It just means your insurer doesn’t have a deal with the maker. These could be newer drugs, off-label uses, or even older drugs that got replaced by generics.

If your doctor prescribes a non-formulary drug, you’ll pay the full retail price - sometimes hundreds or thousands per month. But here’s the catch: you can usually request an exception.

Your doctor fills out a form explaining why you need this specific drug - maybe because you had side effects from all the alternatives, or it’s the only one that works for your condition. If approved, the drug moves to a covered tier, and your costs drop dramatically.

A 2022 case documented by the Medicare Rights Center showed a patient saved $97 a month after getting an exception for a Tier 3 drug to be covered at Tier 2 prices.

Why Do Tiers Change - And Why Is It So Confusing?

Formularies aren’t set in stone. Plans can change tiers quarterly. A drug you paid $15 for in January might jump to Tier 3 in April - with no warning.

Why? Drugmakers renegotiate rebates. New generics hit the market. Insurers cut deals with PBMs (Pharmacy Benefit Managers) like CVS Caremark or Express Scripts - the middlemen who manage most formularies.

A 2022 KFF survey found that 43% of commercial plan members had at least one drug moved to a higher tier without notice. That’s not a glitch - it’s standard practice.

The result? People get confused. A Reddit thread from late 2022 had nearly 300 comments from people asking, “Why is my drug suddenly more expensive?” Only 32% of plans clearly explain how drugs get assigned to tiers.

How to Find Out What Tier Your Drug Is In

Don’t guess. Don’t wait until you’re at the pharmacy. Do this before you fill any new prescription:

• Check your plan’s website. Look for “Formulary” or “Drug List.”
• Download the full formulary document - it’s usually 100+ pages, but searchable.
• Use tools like Medicare’s Plan Finder or Humana’s Drug Cost Finder.
• Call your insurer. Ask: “What tier is [drug name] on my plan?”
• Ask your pharmacist. They have real-time access to your plan’s formulary.

Pro tip: If you’re on multiple medications, make a spreadsheet. List each drug, its tier, your copay, and the date it was last checked. Update it every time you get a new plan document.

What to Do If Your Drug Is Too Expensive

You have options - even if your drug is in Tier 3 or higher:

• Ask your doctor for a generic or Tier 2 alternative.
• Request a formulary exception - your doctor writes a letter explaining medical necessity.
• Apply for patient assistance programs - drugmakers often offer free or discounted meds to those who qualify.
• Use GoodRx or SingleCare - these coupons can beat your insurance price.
• Switch plans during open enrollment - compare formularies before choosing.

The Inflation Reduction Act of 2022 capped insulin at $35/month for Medicare beneficiaries - regardless of tier. That’s a sign that change is coming. More states are pushing for similar caps on other high-cost drugs.

Who Wins and Who Loses With Tiered Formularies?

Insurers and PBMs win. Tiered formularies saved the U.S. system an estimated $14.7 billion in 2022 through negotiated rebates. Medicare Part D saved patients $1.27 per generic prescription - compared to $58.72 for Tier 3 drugs.

But patients? It’s mixed. People on generics love it. Those needing specialty drugs? Often stuck with impossible choices. Research shows each extra tier increases the chance you’ll skip your meds by 5.7% - especially if you’re low-income.

The real problem? Lack of transparency. You can’t predict your costs unless you dig deep. And if your drug gets moved mid-year? You’re on your own.

What’s Changing in 2025?

The future of formularies is shifting. More plans are moving toward “value-based” tiers - where drugs are ranked not just by price, but by how well they improve health outcomes. CVS Caremark already launched diabetes-specific formularies that group drugs by effectiveness, not brand vs. generic.

By 2025, analysts predict 45% of commercial plans will use outcome-based tiers - up from just 12% in 2022. That could mean fewer tiers overall and smarter choices.

But until then? Know your tiers. Know your options. And never assume your drug’s cost is fixed.