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Tiered drug formularies

Health Factors: Quality of Care
Decision Makers: Employers & Businesses Healthcare Professionals & Advocates
Evidence Rating: Mixed Evidence
Population Reach: 50-99% of WI's population
Impact on Disparities: Likely to increase disparities

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A drug formulary is a list of generic and brand name drugs that are preferred by a health plan based upon their effectiveness and cost-savings. Formularies can have a single tier, where all drugs have the same cost to patients, or multiple tiers, where cost varies. Many formularies are three-tiered: generic drugs have the lowest co-pay or cost sharing (tier one); preferred brand name medications have a higher co-pay or cost sharing (tier two), and non-formulary drugs have the highest co-pay or cost sharing or require prior authorization (tier three). Some pharmacy benefit programs have added additional tiers as health care costs rise (RWJF-McCarty 2014). On the federal health care exchanges, many insurance plans have four prescription drug tiers: generic, preferred brand name, non-preferred brand name, and specialty drugs, with specialty drugs usually subject to significantly higher cost-sharing (Buttorff 2015). 

Expected Beneficial Outcomes

Reduced cost of prescription drug benefit
Increased use of generic prescription drugs

Evidence of Effectiveness

There is mixed evidence regarding tiered drug formularies’ effects on health care costs and patients’ medication adherence. Studies indicate that using a 3-tiered drug formulary reduces plan providers’ cost to provide a prescription drug benefit (Cochrane-Luiza 2015, Centeno 2013, Gilman 2008, Landon 2007, Gleason 2005, Huskamp 2005, Lexchin 2002), but also suggest that drug formularies increase patients’ out of pocket costs (Ogbechie 2015, Gilman 2008, Landon 2007, Huskamp 2005, Huskamp 2003). Formularies may increase (Chen 2014, Hoadley 2012) or decrease patients’ medication adherence, depending on structure (Happe 2014, Doshi 2009).  

Compared to plans with fewer tiers, 3-tier formularies increase prescription drug costs for patients (Gilman 2008, Landon 2007, Huskamp 2005, Huskamp 2003), such that patients may decrease (Ungar 2008, Gilman 2008, Huskamp 2005, Landsman 2005) or discontinue use of medications in higher tiers (Gleason 2005, Nair 2003). Additional evidence is needed to determine whether patients are cutting back on drugs treating chronic conditions, switching to a similar drug on a lower formulary tier, or discontinuing use of unnecessary drugs (Gilman 2008, Gleason 2005, Landsman 2005, Huskamp 2003, Nair 2003).

Three-tier formularies increase use of generic drugs (Landon 2007, Gilman 2008) and preferred brand name medications among plan participants (Landon 2007). Having low or no copayments for generic medications on the first tier (Hoadley 2012), and moving drugs into a lower tier, may increase medication adherence (Chen 2014). However, introducing a copayment may lead to decreased adherence, even among high-risk patients (Doshi 2009). Formulary restrictions such as cost-sharing and prior authorization also appear to reduce medication adherence (Happe 2014).

Integrating formularies in electronic health records (EHRs) with decision support may increase physician prescribing of generics (Pevnick 2014, Fischer 2008), but may not significantly increase patients’ medication adherence (Pevnick 2014).


United States

Several states have passed laws aimed at lowering the cost burden of high price prescriptions. New York prohibits the use of specialty tiers, and Delaware prohibits insurers from placing all drugs of a certain type on the specialty tier. Massachusetts, New York, and Vermont limit insurers to three tiers (CWF-Corlette 2015).


The Wisconsin Department of Employee Trust Funds (ETF) uses tiered drug pricing. Such pricing is also very common in commercial health insurance.

Implementation Resources

DERP - Oregon Health & Science University (OHSU). Drug Effectiveness Review Project (DERP). Accessed on October 7, 2016

Citations - Description

Buttorff 2015* - Buttorff C, Andersen MS, Riggs KR, Alexander GC. Comparing employer-sponsored and federal exchange plans: Wide variations in cost sharing for prescription drugs. Health Affairs. 2015;34(3):467-476. Accessed on November 8, 2016
RWJF-McCarty 2014* - McCarty S, Cusano D. Specialty tier pharmacy benefit designs in commercial insurance policies: Issues and considerations. Princeton: Robert Wood Johnson Foundation (RWJF); 2014. Accessed on November 8, 2016

Citations - Evidence

Centeno 2013* - Centeno A, Price V, Robinson N, Tomecko GW, Sedam B. Economic impact of ambulatory care formulary restrictions at a large county health system. American Journal of Health-System Pharmacy. 2013;70(14):1238-1243. Accessed on November 8, 2016
Chen 2014* - Chen SY, Shah SN, Lee YC, et al. Moving branded statins to lowest copay tier improves patient adherence. Journal of Managed Care & Specialty Pharmacy. 2014;20(1):34-42. Accessed on November 8, 2016
Cochrane-Luiza 2015* - Luiza VL, Chaves LA, Silva RM, et al. Pharmaceutical policies: Effects of cap and co-payment on rational use of medicines (Review). Cochrane Database of Systematic Reviews. 2015;(5):CD007017. Accessed on November 8, 2016
Doshi 2009 - Doshi JA, Zhu J, Lee BY, Kimmel SE, Volpp KG. Impact of a prescription copayment increase on lipid-lowering medication adherence in veterans. Circulation. 2009;119(3):390–7. Accessed on October 7, 2016
Fischer 2008 - Fischer MA, Vogeli C, Stedman M, et al. Effect of electronic prescribing with formulary decision support on medication use and cost. Archives of Internal Medicine. 2008;168(22):2433–9. Accessed on October 7, 2016
Gilman 2008 - Gilman BH, Kautter J. Impact of multitiered copayments on the use and cost of prescription drugs among Medicare beneficiaries. Health Services Research. 2008;43(2):478–95. Accessed on October 7, 2016
Gleason 2005* - Gleason PP, Gunderson BW, Gericke KR. Are incentive-based formularies inversely associated with drug utilization in managed care? Annals of Pharmacotherapy. 2005;39(2):339–45. Accessed on October 7, 2016
Happe 2014* - Happe LE, Clark D, Holliday E, Young T. A systematic literature review assessing the directional impact of managed care formulary restrictions on medication adherence, clinical outcomes, economic outcomes, and health care resource utilization. Journal of Managed Care & Specialty Pharmacy. 2014;20(7):677-684. Accessed on November 8, 2016
Hoadley 2012 - Hoadley JF, Merrell K, Hargrave E, Summer L. In Medicare part D plans, low or zero copays and other features to encourage the use of generic statins work, could save billions. Health Affairs. 2012;31(10):2266–75. Accessed on October 12, 2016
Huskamp 2003 - Huskamp HA, Deverka PA, Epstein AM, et al. The effect of incentive-based formularies on prescription-drug utilization and spending. New England Journal of Medicine. 2003;349(23):2224-32. Accessed on October 7, 2016
Huskamp 2005 - Huskamp HA, Deverka PA, Epstein AM, et al. Impact of 3-tier formularies on drug treatment of attention-deficit/hyperactivity disorder in children. Archives of General Psychiatry. 2005;62(4):435–41. Accessed on October 7, 2016
Landon 2007 - Landon BE, Rosenthal MB, Normand S-LT, et al. Incentive formularies and changes in prescription drug spending. American Journal of Managed Care. 2007;13(6 Pt 2):360–9. Accessed on October 7, 2016
Landsman 2005 - Landsman PB, Yu W, Liu X, Teutsch SM, Berger ML. Impact of 3-tier pharmacy benefit design and increased consumer cost-sharing on drug utilization. American Journal of Managed Care. 2005;11(10):621–8. Accessed on October 7, 2016
Lexchin 2002 - Lexchin J. Effects of restrictive formularies in the ambulatory care setting. American Journal of Managed Care. 2002;8(1):69–76. Accessed on October 7, 2016
Nair 2003 - Nair KV, Wolfe P, Valuck RJ, et al. Effects of a 3-tier pharmacy benefit design on the prescription purchasing behavior of individuals with chronic disease. Journal of Managed Care Pharmacy. 2003;9(2):123–33. Accessed on October 7, 2016
Ogbechie 2015 - Ogbechie OA, Hsu J. Systematic review of benefit designs with differential cost sharing for prescription drugs. American Journal of Managed Care. 2015;21(5):e338-e348. Accessed on November 8, 2016
Pevnick 2014 - Pevnick JM, Li N, Asch SM, Jackevicius CA, Bell DS. Effect of electronic prescribing with formulary decision support on medication tier, copayments, and adherence. BMC Medical Informatics and Decision Making. 2014;14:79. Accessed on November 8, 2016
Ungar 2008 - Ungar WJ, Kozyrskyj A, Paterson M, Ahmad F. Effect of cost-sharing on use of asthma medication in children. Archives of Pediatrics & Adolescent Medicine. 2008;162(2):104–10. Accessed on October 7, 2016

Citations - Implementation

CWF-Corlette 2015 - Corlette S, Williams A, Giovannelli J. State efforts to reduce consumers’ cost-sharing for prescription drugs. The Commonwealth Fund Blog. 2015. Accessed on November 8, 2016

Page Last Updated

November 8, 2016

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