The Differences Between Tier 1, Tier 2, and Tier 3 Prescription Drugs

Prescription drug costs put significant pressure on employers, brokers, and patients, regardless of the category a specific treatment falls into. Formularies—lists of covered medications curated by insurance providers—play a crucial role in determining which drugs are accessible to patients. These formularies are paired with utilization management strategies, such as prior authorizations, quantity limits, and step therapy, to guide access and coverage.

Treatments are further organized into tiers, which influence patient cost-sharing responsibilities like copays or coinsurance. These tiers are typically based on factors such as drug type (e.g., generic, preferred brand) or the condition the medication treats (e.g. specialty). Together, formularies and tier structures shape how patients interact with their prescription benefits.

Different drug tiers directly impact an organization’s benefits strategy and ability to support employee needs. Beyond comparing costs and availability between each tier, employers need clear insights into how formulary choices will support their workforce short- and long-term—and that takes a Pharmacy Benefits Manager (PBM) focused on building transparency into every aspect of coverage administration and governance.    

What is a Prescription Drug Tier?

A drug tier structure is a classification system used by PBMs and insurance providers to categorize medications based on safety, efficacy, cost, and coverage. Pharmacy and Therapeutics (P&T) committees—comprised of medical and pharmacy experts—review medications to determine their appropriate tier placement and formulary coverage, ensuring treatments meet clinical and cost-effectiveness standards.

These tiers influence a number of material outcomes:

• Increased Out-of-Pocket Costs. The higher the tier, usually the higher the copay and coinsurance.
• Prioritization of low-cost Drugs. The formulary may favor cover lower-cost drugs such as generics and biosimilars, which can limit coverage of brand name drugs. 
• Shifting Patient Behavior. Lower-tier drugs incentivize patients to choose more affordable treatment options.
• Treatment Category. Some drugs are used to treat complex medical conditions and may be classified as a “specialty” medication. Specialty drugs often require special handling, administration, or disease management for conditions like HIV, cancer, or multiple sclerosis.

Each plan typically includes three or more tiers:

What if a Medication is Not on a Prescription Drug Tier?

In some cases, a medication might not be included in a plan’s formulary or drug tier list. This exclusion can occur for a handful of reasons, and even when medications are excluded, employers and patients have several options to explore.

One of the reasons a new drug might be excluded is simply because it hasn’t yet been reviewed and added to the formulary. But sometimes, the medication is considered experimental, or the PBM’s evaluation and review process shows that the drug doesn’t have clinical benefits an/or isn’t cost-effective. Additionally, certain health plans may automatically restrict access to drugs with lower therapeutic value or especially high costs as a benefit design.

In these situations, patients are encouraged to try alternatives listed on the PBM’s formulary, which have already been reviewed for safety, efficacy, and cost-effectiveness. These alternatives may include generics, biosimilars, or preferred medications within the same therapeutic class. If a prescriber determines that none of the available alternatives meet the patient’s needs, they can explore additional options.

Employers or employees can submit an exception request through their PBM to have the medication covered under their plan, if approved. Additionally, pharmaceutical companies sometimes offer patient assistance programs or coupons to help reduce out-of-pocket costs for medications not covered by the plan.

How do I Know What Drug Tier My Medication is in?

Employers and plan members can determine which drug tier applies in a few ways, including:

• Reviewing the plan’s formulary. Most health plans provide access to their formulary online, detailing the tier classification and any utilization management criteria for each medication.
• Contacting the PBM or insurance provider. PBMs like SmithRx offer customer support for members who need clarification on tier placement, alternatives and the cost for the medication based on the member’s plan design and coverage. 
• Consulting healthcare providers. Physicians and pharmacists can help patients navigate their insurance benefits and suggest lower-tier covered alternatives.
• Using online tools and mobile apps. Some PBMs provide digital tools that allow patients to compare drug prices, coverage options, and tier placement in real time.

Why Prescription Drug Tiers Matter for Employers and Brokers

Understanding how prescription drug tiers function can lead to better decision-making and more cost-efficient healthcare strategies. By working with a transparent PBM like SmithRx, brokers and employers can encourage plan members to choose lower-tier medications, reducing their out-of-pocket expenses, and maximizing savings by ensuring rebates are fully passed through to patients. 

From a governance perspective, simplifying formulary management sets the stage for more direct access to affordable drugs and care. Transparency allows for open pricing negotiation, and a focus on a healthcare strategy that balances all goals of the business. 

The SmithRx Advantage: Transparent, Cost-Focused, and Clear

Legacy PBMs have drawn criticism for hidden fees, spread pricing practices, and conflicts of interest—all of which can make it harder for employers to control prescription drug costs. 

SmithRx breaks the mold with transparent, pass-through pricing that ensures employers pay the exact price the pharmacy is reimbursed—without markups or hidden fees—along with 100% rebate transparency. Our modern, transparent approach is designed to eliminate unnecessary expenses and ensure better value for employers and their members at every stage of the healthcare process. Connect with us today.