Understanding how your prescription drug coverage works is essential to making informed choices and managing costs. A key component is your plan’s prescription drug formulary, which is typically organized into tiers.
What Is a Formulary?
A formulary is the list of prescription drugs your health plan covers, often called a prescription drug list. Organized by drug category, it includes both brand‑name and generic medications. If a drug is on the formulary, your plan will help pay for it, but your cost will depend on the tier the drug is in.
Tiered drugs are categorized as preferred or nonpreferred. Preferred drugs are favored for their cost-effectiveness and clinical value, resulting in lower out-of-pocket costs. Nonpreferred drugs are still covered but typically cost more because they are higher priced or have suitable alternatives.
Some formulary medications are covered at 100%, with no out-of-pocket cost to you. Others require a copayment, a fixed dollar amount set by your plan, or coinsurance, which is a percentage of the medication cost and can lead to higher out-of-pocket expenses.
What Are Tiers and How Do They Work?
Many health plans organize prescription drugs into cost tiers within their formulary. Each tier reflects a different level of cost‑sharing between you and the plan. Higher tiers typically mean higher out‑of‑pocket costs.
Medications are grouped by strength, type, and purpose, from generics to higher‑cost options, and plans may use three, four, or even five tiers. Some drugs may also require prior authorization or step therapy, meaning you might need plan approval before coverage begins or try a lower‑tier medication first.
These tiers typically move from generic to brand-name to specialty medications. Here’s what each category generally means:
- Generic drugs contain the same active ingredients as brand-name drugs and are FDA‑approved for safety and effectiveness. Tier 1 generics typically have the lowest copayment or coinsurance.
- Brand-name drugs are medications sold under a proprietary, trademarked name by the company that developed them. Although they share the same active ingredient as generics, they may differ in strength, intended use, form, administration, or labeling. Generics typically become available after brand-name patents expire.
- Specialty drugs are high-cost medications used to treat complex or chronic conditions, such as cancer or autoimmune diseases. They often require special handling, administration, or prior authorization and typically sit at the highest, most expensive tiers of a formulary.
According to KFF’s 2025 Employer Health Benefits Survey, 84% of covered workers are enrolled in plans with three or more tiers of prescription drug cost sharing, and 60% are in plans with four or more tiers, the most common design. Here’s a look at how these tiers are typically structured and what types of medications fall into each level.
3-tier Plan
- Generic drugs
- Brand-name drugs, including preferred and nonpreferred options
- Highest-cost drugs
4-tier Plan
- Low-cost generic and brand-name drugs
- Higher-cost generic and brand-name drugs
- High-cost, mostly brand-name drugs that may have generics available in Tiers 1 or 2
- Highest cost, mostly brand-name drugs
5-tier Plan
- Preferred generic drugs
- Nonpreferred generic drugs
- Preferred brand-name drugs
- Nonpreferred brand-name drugs
- Highest cost, including most specialty medications
This is a general overview of tiers. Each health plan has its own tier structure and definitions, so be sure to review and understand your plan’s specific formulary.
What if My Prescribed Drug Isn’t Listed?
If a prescribed drug does not appear on any tier of your formulary, it may not be covered under your plan. In that case, it may qualify for a discount through your plan’s drug discount program, or you may need to pay the full cost. To avoid unexpected expenses, review your plan’s formulary before filling a prescription. If your medication is not covered, ask your prescriber about alternative options that are included in your plan.
Where Can I Find My Formulary?
Most insurers provide an online formulary tool where members can search medications by name to check their tier, coverage, and any restrictions. You can also call the number on your ID card for assistance. During open enrollment, your employer may share a summary of your prescription coverage, often with a link or PDF of the formulary and a breakdown of copays or coinsurance by tier.
Conclusion
Prescription drug formularies use tiers to balance access to necessary medications with cost control. Most plans have three to five tiers. By knowing which drugs are covered and how each tier affects your copay or coinsurance, you can make more informed choices and better manage your health care spending. Review your health plan materials or contact HR for details about your prescription benefits. Download the bulletin for more details.
