One of the widely used pharmacy benefit management tools, to control drug expenditures, is three-tier drug co-payment. OBJECTIVES: This study examines the effect of the three-tier drug co-payment, for the individual plan sponsor, on Per Member Per Month (PMPM) ingredient costs, PMPM utilization and ingredient cost per prescription of the preferred and non-preferred drugs. METHODS: Prescription records, from 01/01/99 to 12/31/2000 for members enrolled in a three-tier drug benefit plan at a managed care plan in Toledo-Ohio, were reviewed retrospectively. The top ten therapy classes based on net costs to the health plan were selected for analysis. The records for these classes were extracted using the Rx Clients Report v 5.0 software at the health plan. Data were analyzed using Microsoft Excel 2000. RESULTS: On average 1) PMPM ingredient costs increased 16.5% for the preferred drugs and decreased 7.4% for the non-preferred drugs; 2) PMPM utilization increased 19.3% for the preferred drugs and decreased 12.7% for the non-preferred drugs and; 3) Ingredient cost per prescription increased 2.8% for the preferred drugs and also increased 4.7% for the non-preferred drugs. The increase in the PMPM ingredient costs and PMPM utilization maybe due to the utilization of the most expensive preferred drugs on the formulary. The ingredient costs per prescription were not skewed either towards the preferred or the non-preferred drugs. CONCLUSION: The implementation of a three-tier drug co-payment caused a decrease in the PMPM ingredient costs and PMPM utilization of the non-preferred drugs. It generated cost-savings to the managed care plan over a period of two years by shifting the members from high cost non-preferred drugs to the lower cost preferred drugs.