Medicare Formulary Tiers Are Sending Generics to the Wrong Shelf
Prescription drug spending in the United States has continued to climb as prices rise and payer systems struggle to steer patients toward lower-cost options. Formulary tiering was designed to do the opposite: place cheaper drugs on the least expensive tiers, reduce out-of-pocket costs, and nudge prescribing and dispensing toward value. Instead, the system has increasingly drifted away from that purpose. Analysis of Medicare claims data from roughly one million patients between 2010 and 2017 found a steady worsening in how drugs were assigned to tiers, with generic products moving away from the cheapest tier and onto more expensive, less accessible levels.
The pattern is not subtle. The share of generics placed on the least-expensive tier fell from 73% to 28% over the study period, while the proportion of drugs on inappropriate tiers rose from 47% to 74%. Those numbers describe more than administrative slippage. They point to a reimbursement structure that no longer reliably matches price with access, leaving patients to pay more even when lower-cost equivalents exist.
A Reimbursement System That No Longer Tracks Drug Value
Tiered formularies are meant to organize coverage around cost sharing. In theory, a generic drug should be easy to identify, easy to cover, and easy for patients to afford. In practice, the claims data show a different picture: generics were increasingly moved into higher tiers, where patient cost sharing is greater and access is more difficult. The practical effect is simple and immediate. Patients who could have used inexpensive medications instead face higher copayments or more restrictive benefit design, even when the clinically appropriate alternative is available.
The analysis describes this as distorted tiering, and the term fits. Tiering is supposed to reward patients who choose less expensive drugs, yet the observed movement of generics into costlier tiers reverses that incentive. A system built to restrain spending starts to amplify it. This is especially consequential in Medicare, where even modest increases in out-of-pocket exposure can influence whether beneficiaries fill prescriptions at all or stick with treatment over time.
The Financial Toll Reaches Billions
The economic burden of misclassification is not merely theoretical. Considering only the costs paid by patients and the federal Low-Income Subsidy Program, cumulative tier misplacement amounted to $13.25 billion over the study period. That figure captures waste generated by a system that no longer sorts drugs according to straightforward affordability.
A single sentence captures the problem bluntly: cheaper drugs were increasingly placed where patients had to pay more for them.
The scale matters because formulary design operates across millions of prescriptions. Even small per-prescription errors can accumulate into large systemwide costs when they are repeated across a national program of Medicare’s size. The spending burden also lands unevenly. Patients with limited financial flexibility are the least able to absorb higher cost sharing, and the Low-Income Subsidy Program absorbs part of the damage when the system pushes beneficiaries toward unnecessarily expensive tiers.
Why List Price Became the Proposed Anchor
The article advances a counterintuitive regulatory fix: tiering should be based on a drug’s list price. In ordinary policy debate, list price is often treated with suspicion because rebates and discounts can obscure the true net price paid by plans. Yet the proposal argues that list price should become the touchstone precisely because rebate-heavy arrangements create incentives that distort tier placement. If tiering is anchored to list price, plans would have less room to use opaque rebate structures to justify moving cheaper drugs into more expensive positions.
There is also a behavioral reality behind the proposal. Many patients already pay list price or a price closely tied to it, especially when they face deductibles, high cost sharing, or benefit designs that do not fully pass through plan discounts. Using list price as the benchmark would therefore align the administrative logic of formularies with the amount many patients actually encounter at the pharmacy counter. It would also blunt the incentive for plans and intermediaries to manipulate placement in ways that maximize rebate revenue rather than patient affordability.
The Biology Is Simple; the Incentives Are Not
Drug tiering is not a pharmacologic problem. It is a market-design problem with direct clinical consequences. When access barriers rise, patients may delay initiation, abandon prescriptions, or switch to less effective regimens when the lower-cost option has been moved out of reach. For chronic disease, those disruptions can accumulate into poor control, avoidable exacerbations, and greater downstream spending. A formulary that misplaces generics undermines the very mechanism through which generic substitution is supposed to improve adherence and lower societal cost.
The claims data show the administrative failure; the prescribing consequences follow naturally. If a generic sits on a higher tier, the plan has effectively made the cheaper medicine harder to use. When that happens on a national scale, the result is not simply a pricing anomaly. It becomes a structural barrier to routine care.
A Narrow Reform With Wide Reach
The proposed reform is notable for its simplicity. Rather than adding another layer of complexity to rebate negotiations or utilization management, it would use list price as the organizing principle for tier assignment. That approach aims to reduce incentive-distorting rebate schemes while restoring the basic relationship between cost and access. It is a streamlined answer to a problem created by opacity, misalignment, and competing financial interests.
The article’s strength lies in how directly it documents the drift. Generic drugs moved off the least-expensive tier over time, inappropriate tiering became more common, and the cumulative financial burden climbed into the billions. Those findings leave little room for the idea that tiering drift is an isolated billing quirk. It is a sustained feature of the current system.
What remains unresolved is implementation. A list-price-based standard may be cleaner, but any reform would need to contend with entrenched rebate practices, plan incentives, and the ongoing tension between gross price and net price. Even so, the evidence here makes the central problem difficult to ignore: when tiering stops reflecting affordability, the system stops serving patients and starts charging them for its own distortions.