7.2 Formularies & Drug Tiers

AHIP Medicare Certification Exam

Track your progress as you read

Finished sections get a check mark.

1 Introduction

1.1 About the AHIP Medicare Certification Exam 1.2 How to Use This Study Guide

2 Chapter 2: Medicare Program Fundamentals

2.1 What Medicare Is: Program Structure & How Parts A–D Fit Together 2.2 Medicare Part A — Hospital Insurance 2.3 Medicare Part B — Medical Insurance 2.4 Medicare Eligibility Rules (Age 65, Disability, ESRD, ALS)

3 Chapter 3: Medicare Enrollment Periods

3.1 Initial Enrollment Period (IEP) 3.2 Annual Enrollment Period (AEP): October 15 – December 7 3.3 Medicare Advantage Open Enrollment Period (MA OEP): January 1 – March 31 3.4 Special Enrollment Periods (SEPs) & Qualifying Life Events 3.5 Late Enrollment Penalties (Part A, Part B, Part D)

4 Chapter 4: Medigap & Coordination of Coverage

4.1 Medigap (Medicare Supplement) Basics & Guaranteed Issue Rights 4.2 Dual Eligibility & Medicare Savings Programs 4.3 How Original Medicare, MA, Part D & Medigap Interact

5 Chapter 5: Medicare Advantage Plan Types

5.1 Medicare Advantage (Part C) Overview: How MA Differs from Original Medicare 5.2 HMO & HMO-POS Plans 5.3 PPO Plans 5.4 PFFS Plans (Private Fee-for-Service) 5.5 MSA Plans (Medicare Medical Savings Accounts) 5.6 Cost Plans & Employer Group Waiver Plans (EGWPs)

6 Chapter 6: Special Needs Plans & MA Plan Design

6.1 Special Needs Plans (SNPs) Overview 6.2 D-SNP — Dual-Eligible Special Needs Plans 6.3 C-SNP & I-SNP — Chronic Condition & Institutional Special Needs Plans 6.4 MA Benefits, MOOP & Supplemental Benefits 6.5 MA Star Ratings & Plan Quality

7 Chapter 7: Part D Structure & the 2026 Redesign

7.1 Part D Overview & Eligibility 7.2 Formularies & Drug Tiers 7.3 The 2026 Part D Benefit Redesign ($2,100 OOP Cap, $615 Max Deductible, Catastrophic Phase) 7.4 Medicare Prescription Payment Plan (Drug-Cost Smoothing)

8 Chapter 8: Part D Costs, Assistance & Appeals

8.1 Low-Income Subsidy (LIS) / Extra Help 8.2 Part D Late Enrollment Penalty & Creditable Coverage 8.3 Coverage Determinations, Exceptions & Appeals

9 Chapter 9: CMS Marketing Rules & Scope of Appointment

9.1 CMS Medicare Communications & Marketing Guidelines (MCMG) Overview 9.2 Scope of Appointment (SOA): the 48-Hour Rule & Exceptions 9.3 Permitted vs. Prohibited Marketing & Sales Activities 9.4 Marketing Events vs. Educational Events

10 Chapter 10: Enrollment & Disclosure Requirements

10.1 The Pre-Enrollment Checklist (PEC) 10.2 Enrollment Procedures & Application Requirements 10.3 Call Recording & Third-Party Marketing Organization (TPMO) Disclaimers 10.4 Agent & Broker Compensation Rules

11 Chapter 11: Marketing Conduct & Oversight

11.1 Cross-Selling Restrictions & Nominal Gift Value Rules 11.2 Marketing to Vulnerable Populations & Non-Discrimination in Sales 11.3 Website, Social Media & Advertising Compliance 11.4 Complaint Tracking Module (CTM) & Agent Oversight

12 Chapter 12: Understanding Fraud, Waste & Abuse

12.1 Defining Fraud, Waste & Abuse (and the Difference Between Them) 12.2 The False Claims Act 12.3 The Anti-Kickback Statute

13 Chapter 13: Compliance Laws & Screening

13.1 The Stark Law (Physician Self-Referral) 13.2 HIPAA Privacy & Security Basics 13.3 The OIG Exclusion List & Sanctioned-Provider Screening

14 Chapter 14: Reporting, Compliance Programs & Consequences

14.1 Detecting & Reporting FWA 14.2 Compliance Program Requirements (Seven Core Elements) & Non-Discrimination Training 14.3 Consequences & Corrective Action Plans

7.2 Formularies & Drug Tiers

Key Takeaways Explain This Topic AI

A formulary must cover at least two drugs per therapeutic category (with rare exceptions) and 'all or substantially all' drugs in six protected classes: antidepressants, antipsychotics, anticonvulsants, immunosuppressants, antiretrovirals, and antineoplastics.

The standard formulary structure uses five tiers: preferred generic, generic, preferred brand, non-preferred, and specialty — lower tiers typically use flat copayments while higher tiers shift to percentage-based coinsurance.

Prior authorization, step therapy, and quantity limits are the three utilization management tools plans use to control formulary access.

A formulary exception requests coverage of a non-formulary drug; a tiering exception requests lower cost-sharing for a drug already on formulary but in an expensive tier — both require prescriber documentation.

New enrollees already taking a non-formulary or restricted drug are entitled to a one-time transition supply (generally up to 30 days) so therapy is not interrupted while an exception is requested; preferred pharmacies also offer lower cost-sharing than standard network pharmacies for the identical drug and tier.

Last updated: July 2026

Why Formularies & Drug Tiers Matter on the AHIP Exam

Every Part D plan sponsor builds its own formulary — the list of drugs it covers — and organizes that list into cost tiers . This is one of the most practical, day-to-day pieces of Part D knowledge an agent uses: clients ask "will my plan cover my medication, and how much will it cost?" almost every enrollment season. The AHIP exam tests both the CMS rules that constrain what a formulary must include and the standard tier structure that determines what a client pays at the pharmacy counter.

What a Formulary Is — and What CMS Requires

A formulary is a plan sponsor's list of covered prescription drugs, reviewed and approved annually by CMS. Plans have significant flexibility in building their formulary, but CMS imposes minimum requirements to prevent discrimination against beneficiaries with expensive or complex conditions:

At least two drugs per therapeutic category or class must be covered (unless only one drug exists in that category), so a beneficiary always has an alternative if one drug is not covered or is not tolerated.

All or substantially all drugs must be covered in six protected classes : antidepressants, antipsychotics, anticonvulsants, immunosuppressants (for transplant rejection), antiretrovirals (HIV/AIDS), and antineoplastics (cancer). These classes cover conditions where drug switching can be medically dangerous, so CMS locks in broad coverage.

Formularies must be posted publicly and updated with required notice before CMS-approved mid-year changes (such as removing a drug for safety reasons).

The Standard Five-Tier Structure

Most Part D formularies (standalone PDP and MA-PD alike) use a five-tier cost-sharing structure. The AHIP exam expects you to recognize each tier by name and typical cost-sharing method:

• Tier Description Typical Cost-Sharing
• Tier 1 Preferred generic drugs Lowest fixed copayment (e.g., $0-$5)
• Tier 2 Generic drugs Low fixed copayment (e.g., $10-$20)
• Tier 3 Preferred brand drugs Moderate copayment or coinsurance

Tier 4 Non-preferred drugs (higher-cost generics and brands with a lower-cost alternative) Higher coinsurance, often 25%-50%

Tier 5 Specialty drugs (very high-cost or unique drugs, including many biologics) Highest coinsurance, often 25%-33%

Pattern to remember: lower tiers (1-2) generally use flat-dollar copayments ; higher tiers (3-5) generally shift to coinsurance (a percentage of the drug's cost), which is why a client's out-of-pocket cost for a Tier 5 specialty drug can vary sharply between plans even when both plans "cover" the drug.

Utilization Management Tools

Plans use several tools to manage formulary access, and all three appear regularly in exam scenario questions:

Prior authorization (PA) — the prescriber must justify medical necessity before the plan will cover the drug.

Step therapy — the beneficiary must try a lower-cost drug first and demonstrate it does not work before the plan covers a costlier alternative.

Quantity limits (QL) — the plan caps how much of a drug it will cover in a given period (for example, limiting opioid quantities per CMS safety edits).

Formulary and Tiering Exceptions

If a drug is not on the formulary at all, or a beneficiary believes a lower tier's pricing should apply because of a documented medical need, they (or their prescriber) can request an exception :

A formulary exception asks the plan to cover a non-formulary drug.

A tiering exception asks the plan to apply a lower tier's cost-sharing to a drug that is on formulary but sits in an expensive tier — for example, moving a Tier 4 drug to Tier 2 pricing because the Tier 1-2 alternatives caused an adverse reaction.

Exceptions require a supporting statement from the prescriber. This is the first step of the coverage determination and appeals pathway, which Section 8.3 covers in full detail — do not confuse a same-tier exception request with a full appeal.

Exam Scenario

A client's cardiologist prescribes a brand-name blood thinner sitting on the plan's Tier 4. Two lower-tier generics exist, but the client had a documented adverse reaction to both. The correct next step is not to change plans mid-year — it is for the prescriber to submit a tiering exception request with supporting medical documentation, asking the plan to apply Tier 2 cost-sharing to the Tier 4 drug.

Preferred vs. Standard Pharmacy Networks

Formularies interact with a second cost variable the exam expects you to know: the plan's pharmacy network . Most Part D and MA-PD plans contract with a broad network of standard pharmacies but negotiate lower cost-sharing at a smaller set of preferred pharmacies. The drug and its tier stay the same — only the cost-sharing amount changes depending on which pharmacy the beneficiary uses. A client who fills the same Tier 2 generic at a standard pharmacy instead of a preferred one might pay a noticeably higher copayment for an identical drug, which is why agents should always confirm a client's regular pharmacy is in the plan's preferred network before enrollment, not just confirm the pharmacy is "in network" at all.

The New-Enrollee Transition Supply Requirement

CMS requires every Part D and MA-PD plan to provide a one-time transition supply (generally up to a 30-day supply, or less for a shorter prescription) for a new enrollee who is already taking a drug that is not on the new plan's formulary, is subject to prior authorization, or is affected by step therapy or a quantity limit. This transition fill gives the beneficiary and prescriber time to either switch to a formulary alternative or file a formulary exception request, without an interruption in therapy during the switch. This rule also applies to current enrollees affected by a mid-year formulary change (such as a safety-related drug removal) and to residents of long-term care facilities, who may receive an extended transition supply given the higher stakes of an abrupt medication change.

Common Exam Traps

Assuming a formulary must cover every drug in a category — the rule is at least two, except in the six protected classes.

Mixing up "formulary exception" (asking for a non-covered drug) with "tiering exception" (asking for a lower price on a covered drug).

Forgetting that copayments (fixed dollar) and coinsurance (percentage) apply to different tiers, which changes how a premium-cost comparison actually plays out for a specific client's drug list.