Drug tiering can be simple—such as distinguishing between preferred vs. non-preferred drugs—but it can also be quite complex. Formularies often use 3 or 4 tiers, though some may have up to 6 or more distinct tiers. Tier 1 is typically reserved for the most preferred drugs, and as the tier number increases, drugs become less affordable with higher cost-sharing for the patient.

As specialty medications become more prevalent, they often require placement in a specialty tier. These medications usually involve higher patient costs and are designed for complex, high-cost disease states.

Specialty drug tiers are growing in popularity. In the last decade, there has been an increase in generics placed on “specialty” tiers, increasing from 2.5% in 2016 to 8.4% in 2025.

As an example of a common 5-tier formulary design is included below. Generics are most preferred, followed by preferred brand-name drugs. The next three tiers are nonpreferred brand drugs, preferred specialty drugs, and nonpreferred specialty drugs.

Exhibit 1- Five-Tier Formulary Design2

• TIER 1 – Generic drugs: Typically, the most affordable and are equal to their brand-name counterparts in quality, performance characteristics, and intended use.
• TIER 2 – Preferred brand-name drugs: Proven to be safe, effective, and favorably priced compared to nonpreferred brands.
• TIER 3 – Nonpreferred brand-name drugs: These drugs have either a generic or preferred brand available; therefore, patients’ cost share will be higher.
• TIER 4 – Preferred specialty drugs: Proven to be safe, effective, and favorably priced compared to nonpreferred specialty drugs.
• TIER 5 – Nonpreferred specialty drugs**: These drugs typically have a preferred brand available; therefore, patients’ cost share will be higher.

What is the impact of drug tiering on reimbursement and affordability?

A key aspect of drug pricing and patient access is formulary design, which includes the critical factor of drug tiering. The placement of a drug in a formulary determines how affordable it will be for patients, and thus, how widely it will be prescribed. This is an important consideration for products managed in the pharmacy benefit, such as pharmaceutical products, subscription digital therapeutics, and self-injectables.

As formulary designs evolve, tiering has become more complex. With each added tier, more financial responsibility may shift to the patient from other stakeholders. As treatments become less affordable from the patient perspective, access and getting treatment in patients’ hands becomes more challenging. This directly impacts both reimbursement rates and affordability.

For perspective, the annual costs of therapy varies widely between drug tiers. For generic drugs, the average annual cost of therapy was $679. For brand name drugs, the average annual cost of therapy was about ten times more ($6,604). Meanwhile, specialty drugs’ annual cost of therapy was about 125x the cost of the generic tier, averaging $84,442 per year.

Strategies to Optimize Drug Tiering for Pharma Companies

Drug tiering is an important consideration for a market access strategy. If left unaddressed, the tier placement of a drug is generally determined by clinical relevance, treatment pathway, and cost-effectiveness, which are assessed through FDA approval and health economics and outcomes research (HEOR) studies.

**Several tactics can be employed to influence tier placement: **

1. Clinical Evidence: Working with medical counterparts to design clinical trials or studies to prove the superiority or non-inferiority of a treatment can improve its positioning in formularies.
2. Health Economics and Outcomes Research (HEOR): Developing cost-effectiveness models to highlight potential long-term cost savings can help advocate for a more favorable tier placement.
3. Real-World Evidence (RWE): Demonstrating a drug’s prolonged effectiveness through RWE can help position it as a preferred therapy and ultimately shift it to a more advantageous tier.

Alternatively, rebating and contracting strategies can expedite the process by negotiating directly with PBMs to secure preferential placement for a drug within formularies. These negotiations often result in mutually beneficial agreements between payers and manufacturers. Rebating and contracting are two of the most direct and impactful strategies for influencing drug tier placement within a formulary. These strategies are critical for pharmaceutical manufacturers seeking to secure more favorable tier placements and, ultimately, maximize patient access to their drugs.

Once negotiated, understanding the intricacies of formulary design and tier placement enables pharma companies to validate and monitor the effectiveness of contracts over time. With concerted negotiation between payers and pharmaceutical manufacturers to have mutually beneficial drug tier placements, it is imperative to protect the contract terms and considerable negotiation.

Transparency across payer drug tier placements eases this burden to empower pharmaceutical manufacturers to ensure the contract is upheld. Ensuring that negotiated terms are upheld is crucial to maintain access and market share.

Exceptions to Optimize Drug Tiering

While rebates and contracting strategies focus on ensuring preferred placement within formularies, exceptions can bridge gaps when placement is not ideal. By combining these strategies, pharmaceutical companies can ensure that their products are accessible to as many patients as possible while maximizing revenue and reimbursement.

Even with effective rebate and contracting strategies, it’s important for pharmaceutical companies to understand that exceptions to drug tier placements exist, and these can be leveraged to ensure patients have access to the drug at a lower cost or through faster approval processes. Typically, these fall in two categories – tiering exception and formulary exception.

• Tiering exceptions allow patients to obtain a non-preferred drug at a lower cost-sharing level, similar to that of a preferred drug.
• Formulary exceptions enable patients to request a drug not included in the formulary or to waive utilization management requirements (e.g., step therapy, prior authorization, or quantity limits).

According to the Centers for Medicare & Medicaid Services, a tiering exception can be requested to “obtain a non-preferred drug at the lower cost-sharing terms applicable to drugs in a preferred tier.” Meanwhile, a formulary exception can be requested to “obtain a Part D drug that is not included on a plan sponsor's formulary, or to request to have a utilization management requirement waived (e.g., step therapy, prior authorization, quantity limit) for a formulary drug.”

Despite the specific parameters around Part D, most payers have a process for tiering exception or formulary exception. The expectations and process are detailed in payer documentation, often on the formulary document.

Maximizing Outcomes with Drug Tiering and Access

Navigating the complexities of drug tiering, formularies, and access processes requires a strategic approach to ensure that pharmaceutical companies can achieve optimal market access for their products. Maximizing outcomes in drug tiering is not just about securing the best tier placements but also about maintaining long-term patient access, cost-effectiveness, and market competitiveness.

To navigate formularies, drug tiering, and the exception processes effectively, it starts with getting accurate and complete formulary data. However, gathering this information manually from over 2,100 formularies nationwide can be a time-consuming and error-prone process. This can be challenging through conventional means of scouring the internet for individual formularies to extract a single line of data, which can take hours of menial data collection.

Pharmaceutical companies can secure better tier placements, enhance patient access, and ultimately improve health outcomes by focusing on accurate, timely data.

Fortunately, Policy Reporter can automate formulary data extraction for you. With tools like Formulary Viewer and Formulary Alerts , you can receive fast, real-time alerts about tier changes and compare tier placements across payers with ease. Click here to schedule a demo.

References

1. Scott, Margaret, Nadia Mercado, Sophia Lopez, and Massey Whorley. “Study: 57 Percent of Covered Generic Drugs Not on Part D Generic Tiers in 2025.” Avalere Health (2024). https://advisory.avalerehealth.com/insights/57-of-covered-generic-drugs-not-on-part-d-generic-tiers-in-2025
2. Werble, Cole. “Formularies.” Health Affairs Health Policy Brief (September 14, 2017). http://doi.org/10.1377/hpb20171409.000177
3. Purvis, Leigh, and Dr. Stephen Schondelmeyer. “Trends in Retail Prices of Prescription Drugs Widely Used by Older Americans, 2006 to 2020.” AARP (2024). https://www.aarp.org/pri/topics/health/prescription-drugs/trends-in-retail-prices-of-drugs
4. Centers for Medicare & Medicaid Services. “Exceptions.” (2024, September). https://www.cms.gov/medicare/appeals-grievances/prescription-drug/exceptions