Rx Toolbox

A short description of how tiered plans and cost-sharing work.

September 18, 2003

Rx Toolbox


How it works

PBM contract

Companies should try to negotiate a better deal with their pharmacy-benefit manager (PBM) every few years as the industry consolidates and competition increases. 

Negotiations should focus on:

  • Performance guarantees with financial penalty for not achieving agreed-upon goals 

  • A share in manufacturer rebates Lower administration fees 

  • Better pricing

Cost sharing

Shifts costs to employees using flat dollar co-pays or percentage-based co-insurance. Although many employers use co-pays, more are considering co-insurance to limit exposure to future cost increases. Surveys show that that increasing a co-pay from $5 to $10 can reduce costs 22%.

Tiered plans

Offer different levels of coverage for different drug categories. Surveys show that doubling co-pays in tiered plans can reduce costs by 33%. Tier 1 would have the highest coverage level and each successive tier would have a progressively lower level of coverage

  • Tier 1: Generic drugs
  • Tier 2: Preferred brand name drugs, usually those with no generic substitute
  • Tier 3: Non-preferred brand name drugs, usually those with a generic substitute
  • Tier 4: Lifestyle drugs, such as Viagra

Mail order

Employees fill prescriptions through the mail. Considered the most cost-effective distribution channel with the potential to save 4% to 6% depending on plan design.

Mandatory generic

Plan does not cover a brand name drug if a generic substitute exists or requires the employee to pay any difference between the cost of the brand and the cost of the generic. This could save up to 5% as more generics become available for current brand name drugs.

Prior authorization

Requires physician verification before prescription can be filled.

Sources: Kevin DeStefino, Watson Wyatt Worldwide 
"Employer Drug Benefit Plans and Spending on Prescription Drugs," The RAND Corporation.