Explaining the Tier System of Copays in Part D Drug Coverage

What are the different copayments for each tier?

En español | Q. I'm new to Medicare and signed up with a plan for Part D drug coverage. The plan has sent me information saying there are different copayments or coinsurance for different "tiers." I don't understand what this means. Can you explain?

A. Most Medicare Part D drug plans use a tiered system of copays. Basically, it's a way of holding down costs for both the plans and their enrollees, by charging lower copays for less expensive drugs and higher copays for costlier ones. The tier system tries to steer you into using lower-cost drugs, such as generics or older versions of a particular drug. You'd need to talk to your doctor to see whether there's a lower-cost drug that would work as well for your medical condition as a higher-priced brand-name drug. If there is, you'd save a lot of money.

A copay is a flat dollar amount that you pay as your share of the cost of each prescription. Coinsurance means that you pay a percentage of the cost instead of a flat dollar amount. So, for example, if a drug costs your plan $200, and it charges a copay of $40, that's what you pay at the pharmacy. But if your plan charges 25 percent coinsurance for the same drug, you'd pay $50.

Part D plans group different drugs into cost levels known as "tiers," and each of these requires a separate amount that you pay as your share. For example, for each prescription a plan may charge $5 for Tier 1 drugs; $45 for Tier 2 drugs; $80 for Tier 3 drugs; and 33 percent of the cost for Tier 4 drugs. This is a fairly typical pattern, but individual plans can vary it in many ways. Some plans have five or six tiers, and some have just one in which a percentage of the cost (typically 25 percent) is charged for all drugs.

Tier 1 always carries the lowest copay and typically applies only to generic drugs. Tier 2 is often for "preferred" brand-name drugs. Tier 3 is often for "non-preferred" brand names. Tier 4 is for usually for "specialty" drugs, meaning very expensive ones and those used to treat rare conditions.

What do preferred and non-preferred mean? Every Part D plan negotiates a price — with the manufacturer — for each drug it covers. If the plan obtains a good discounted price, it regards that drug as "preferred." If it doesn't get a good price, the drug is designated "non-preferred." Naturally, the plan "prefers" you to use the drug for which it has paid a lower price — so it puts that drug in a lower tier with a lower copay.

This is why you should carefully compare plans according to the specific drugs you take, either when you first join the program or at the end of each year when you can switch to a different plan.

Part D plans are free to change their tier levels — as well as the drugs that are grouped in each level and the copays charged for each level — every calendar year.

In cases where the tiered copay is actually higher than the full price the plan pays to the manufacturer, the law requires the plan to charge you the lower amount. For example, if a plan's full price for a Tier 2 drug is $30, but its Tier 2 copay is normally $45, you would pay $30 for your prescription and not $45.

Tiered charges — copays or coinsurance — are applied only to the initial coverage period — that is, before the full price of the drugs you use reaches a certain level ($2,840 in 2011) from the beginning of the year or, if you're new to Part D and enrolled partway through the year, from the time you joined a plan. Beyond that point, you're in a coverage gap known as the "doughnut hole" when different charges kick in.

Patricia Barry is a senior editor at the AARP Bulletin.

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