Formulary Tier

Key facts

Common Part D tiers

Preferred generic, generic, preferred brand, non-preferred drug, specialty

Specialty tier

Part D drugs above a monthly cost threshold set by CMS

Tiering exceptions

Part D enrollees can request lower cost sharing, with limits

Part D out-of-pocket cap

$2,000 in 2025, indexed in later years

What is a formulary tier?

Plans group covered drugs into tiers so that cost sharing reflects the plan's preferences. A patient typically pays a flat copay on lower tiers and a percentage coinsurance on higher tiers, which ties out-of-pocket costs on those tiers to the drug's price.

Tier placement is separate from coverage restrictions. A drug can sit on a preferred tier and still require prior authorization, or sit on a non-preferred tier with no restrictions.

How tiers are typically structured

Structures vary by plan. Commercial plans often use three or four tiers, and Medicare Part D plans commonly use five or six. A common pattern is:

• Preferred generic and generic tiers with the lowest copays.
• Preferred brand tier for brands that won favorable placement, often in exchange for manufacturer rebates.
• Non-preferred drug tier with higher copays or coinsurance for drugs that have preferred alternatives.
• Specialty tier for high-cost drugs, usually with coinsurance. In Medicare Part D, plans can exclude specialty tier drugs from tiering exceptions.

Why tier placement matters

For manufacturers, moving from a non-preferred to a preferred tier can cut patient out-of-pocket costs and prescription abandonment at the pharmacy counter, so tier position is a main bargaining chip in rebate negotiations. Coinsurance on specialty tiers exposes patients to list price, which is one reason manufacturers fund copay assistance for commercially insured patients.

In Medicare Part D, the Inflation Reduction Act of 2022 changed the stakes. Starting in 2025, annual out-of-pocket spending on covered Part D drugs is capped ($2,000 in 2025, indexed after that), so tier placement mainly determines how quickly beneficiaries reach the cap. Medicare cost sharing for covered insulin is also limited to $35 per month.

Analysts compare tiers across plans and regions to measure the quality of access, not just whether a drug is covered.