| Thu, Feb 06, 2014 @ 09:00 AM

Understanding the Medicare Drug Tier System

Posted by Medicare Made Clear

prescription drugsPrescription drugs are covered by Medicare Part D and many Medicare Advantage (Part C) plans. Those plans are offered by private insurance companies approved by Medicare. Before we talk about drug tiers specifically, let’s briefly explore how those companies offer that coverage:

  • All prescription drug plans (PDPs) have a formulary. A formulary is a list of drugs that are covered by the plan.
  • By law, PDPs’ formularies must include both brand name and generic drugs. They also must include choices within commonly prescribed drug categories and classes.
  • Each plan’s formulary can be different from that of other plans. One plan may cover a drug that another plan doesn’t.
  • Formularies can change from year to year—and even month to month.

But how does a PDP create its formulary in the first place? Well, the purpose of the formulary is to identify medications that are both medically effective for the members, but are also cost-effective for the company offering the plan. The effort to control prescription drug costs is where the system of drug tiers comes in.

What are drug tiers?

The companies that offer PDPs usually divide the prescription drugs they cover into groups called “tiers.” The tier each drug goes into is based on what the plan pays to the pharmaceutical company that makes the drug. Each plan negotiates drug pricing separately with those pharmaceutical companies. If a plan negotiates a lower price on a particular drug, then it can place it in a lower tier and pass the savings onto its members. This is one reason you might pay more for a drug on one PDP’s formulary over another’s. Each of the tiers has a different copay, coinsurance and cost-sharing.

How do the drug tiers work?

Each company that offers a PDP decides on its own tier system. A plan’s formulary might have three, four or even five tiers. In general, the lowest-tier drugs are the lowest cost; the higher the tier number, the more expensive the drugs. Here’s a general outline of how drug tiers work:

  • Tier 1 is usually generic prescription drugs.
  • The next tier is usually “preferred” brand name medications. These are drugs that the insurance company has negotiated with select pharmaceutical companies to get for a better rate.
  • The next tier is usually the “non-preferred” brands, or drugs that treat the same things as the “preferred” brands, but from other companies, for higher cost.
  • The drugs on the highest tier are often unique, specialty drugs. They cost the most. Rather than pay a copay for these, the member is often required to pay a percentage for the outright cost of the drug.

Why do formularies change, with tiers changing for certain drugs?

Often, generic versions of older drugs enter the market. New pricing for drugs may be negotiated, particularly for a new calendar year. These both may lead a plan to add or remove a particular drug from its formulary or to move it into a different tier. Usually, plans are required to inform members taking a certain drug in advance if the drug is going to be moved to a different tier, or removed altogether.

How can you save money by knowing about your plan’s drug tiers?

As a PDP member, you’ll want to become familiar with your plan’s drug tiers. You can find your plan formulary on your plan website, or call your plan to ask. Before you enroll in a new Part C or D plan, make sure you check the tier of any prescription drugs you currently take. Then you can calculate your copay or coinsurance. If you’re prescribed a new drug by your doctor, you can find it on the formulary and identify the tier it is in.

If your doctor suggests a drug on a higher tier of your formulary, you may be able to substitute a similar but less expensive drug on a lower tier. Generics are always a good place to look for drug savings, as they tend to be the least expense. Discuss with your doctor whether or not a lower-cost drug might work for you. If not, you may file an exception and ask your plan to allow you to pay the lower cost for the higher-tier drug.

For more information, explore MedicareMadeClear.com or contact the Medicare helpline 24 hours a day, seven days a week at 1-800-MEDICARE (1-800-633-4227), TTY 1-877-486-2048.


Medicare Made Clear: Get more reliable information about Medicare Part D prescription drug plans.

Your Guide to Prescription Drug Coverage: Created for Medicare.gov, the official U.S. government site for Medicare.


Y0066_140124_142259 Accepted