When you fill a prescription for a generic drug, you might think the price you see at the pharmacy is the full cost. But what your insurance company actually pays? That’s a different story-and it’s not always what you’d expect.
Generics don’t work like brand-name drugs
Most people assume all prescription drugs work the same way when it comes to pricing. That’s not true. Brand-name drugs often come with big rebates-sometimes 30% to 70% off the list price. These rebates are negotiated by pharmacy benefit managers (PBMs), who act as middlemen between drug makers, insurers, and pharmacies. The insurer pays the full list price upfront, then gets a chunk of that money back later as a rebate. It’s a system designed to make expensive drugs look cheaper on paper.Generics? They don’t play by those rules.
Why? Because there’s no reason to. Generic drugs are made by multiple manufacturers. They’re copies of expired brand-name drugs, and they compete on price. That competition keeps the list price low-often under $10 for a 30-day supply. With prices already this low, there’s almost no room for big rebates. In fact, the U.S. Government Accountability Office found that when rebates do happen on generics, they’re usually just 2% to 5% of the list price. Compare that to the 30%-70% rebates on brand-name drugs. That’s not a difference in degree-it’s a difference in system.
What insurance really pays for generics
So if there’s no rebate, how does insurance pay for generics?The answer lies in something called spread pricing.
Here’s how it works: Your insurance plan agrees to reimburse the pharmacy a certain amount-for example, $8.50-for a generic pill. But the pharmacy’s actual cost to buy that pill from the wholesaler might be only $4.25. The $4.25 difference? That’s the spread. And it doesn’t go to the pharmacy. It goes straight to the PBM.
This isn’t a rebate. It’s not a discount. It’s a hidden profit. The insurer thinks they’re paying $8.50. The pharmacy gets $4.25. The PBM pockets $4.25-and you never see a line item for it on your explanation of benefits.
According to the U.S. Department of Health and Human Services, the average spread on generic prescriptions in 2022 was $4.73 per fill. Multiply that by millions of prescriptions, and you’re talking about billions of dollars shifting from insurers-and ultimately, you-to PBM profits.
Why PBMs don’t want you to use generics
Here’s the twist: even though generics are cheaper, PBMs sometimes push you toward more expensive brand-name drugs.Why? Because those brand-name drugs come with big rebates. If a PBM gets a 60% rebate on a $50 brand-name drug, that’s $30 back. Even if the generic costs $1, the rebate on the brand-name drug can make the whole transaction more profitable for the PBM-even if the insurer ends up paying more overall.
A 2023 report from Rightway Healthcare found that PBMs frequently exclude low-cost generics from their formularies to keep brand-name drugs with high rebates in place. One employer case study showed a PBM blocking a $0.15-per-dose generic in favor of a $5.00 brand-name drug with a 60% rebate. Net result? The insurer paid more, the patient paid more, and the PBM made more.
This isn’t a glitch. It’s a design flaw. The system rewards PBMs for maximizing rebate income, not minimizing total drug costs. That’s why the Commonwealth Fund called it a “perverse incentive.”
The difference between list price and net price
You’ve probably seen drug prices advertised as “$500 per pill.” That’s the list price. It’s not what anyone actually pays. But for generics, there’s no list price to hide behind.For brand-name drugs, the list price is inflated to make rebates look bigger. For generics, the list price is usually just the wholesale cost. There’s no game. No manipulation. Just a low price set by competition.
But because PBMs control the reimbursement rate, they can still make the real cost look higher than it is. They set the reimbursement rate at $8.50, even though the drug costs $4.25. The insurance company thinks they’re paying $8.50. The pharmacy gets $4.25. The PBM keeps the rest.
That’s why employers and self-insured plans struggle to know what they’re really spending. A 2023 survey by the National Business Group on Health found that 68% of large employers couldn’t accurately track the net cost of generic drugs because PBMs refused to disclose acquisition prices.
What’s changing-and what’s not
There’s pressure to fix this. The No Surprises Act of 2020 started forcing some transparency. The Biden administration’s 2024 executive order directed the Department of Health and Human Services to look into practices that limit generic use. And by 2026, new legislation is expected to require PBMs to fully disclose the true cost of generic drugs.Meanwhile, more employers are switching to “pass-through” pricing models. Instead of letting PBMs keep the spread, the insurer pays the pharmacy’s actual cost-plus a flat administrative fee. No hidden profits. No spread. Just transparency.
In 2020, only 18% of large employers used this model. By 2024, that number jumped to 42%. It’s not widespread yet-but it’s growing.
And here’s something important: Medicare’s new drug price negotiation program, which started in 2025, explicitly excludes generics. Why? Because lawmakers recognized that generics already work on competition, not rebates. The system is already designed to keep prices low. Adding negotiation would be redundant-and possibly disruptive.
What you can do
If you’re a patient, you have little direct control over PBM practices. But you can still protect yourself:- Always ask if a generic is available-even if your doctor didn’t suggest it.
- Check your plan’s formulary. If a generic is excluded, ask why. It might be because of a rebate deal, not medical necessity.
- Use tools like GoodRx or SingleCare to compare cash prices. Sometimes, paying cash is cheaper than using insurance because of how spreads work.
- If you’re an employer or plan sponsor, demand full cost transparency from your PBM. Ask for the actual acquisition cost of every generic drug on your formulary.
The bottom line: Insurance doesn’t pay rebates on generics. It pays spreads. And those spreads aren’t helping you save money-they’re lining the pockets of middlemen.
Generics are the most effective tool we have to lower drug costs. But as long as the system rewards opacity over transparency, their potential will be held back-not by science, but by finance.
Do generic drugs have rebates like brand-name drugs?
No, generic drugs rarely have rebates. Unlike brand-name drugs, which often come with 30%-70% rebates negotiated by pharmacy benefit managers (PBMs), generics are sold at low, competitive prices with little to no room for rebates. When rebates do occur, they’re typically only 2%-5% of the list price. The system for generics relies on direct pricing, not post-purchase discounts.
Why does my insurance pay more for a generic than what the pharmacy pays?
That difference is called “spread pricing.” Your insurance plan reimburses the pharmacy a set amount-say $8.50-but the pharmacy’s actual cost to buy the drug is lower, like $4.25. The $4.25 difference goes to the PBM, not the pharmacy. This is a hidden profit for the PBM, not a rebate to the insurer. It’s not disclosed on your explanation of benefits, which is why many people don’t realize it’s happening.
Are PBMs discouraging the use of generic drugs?
Yes, in some cases. PBMs make more money from rebates on expensive brand-name drugs than from low-cost generics. To maximize rebate income, some PBMs exclude generics from their formularies-even when they’re medically appropriate-so they can promote higher-priced drugs with bigger rebates. This is called a “perverse incentive,” and it’s been documented by the Commonwealth Fund and Rightway Healthcare.
Why are generics excluded from Medicare’s new drug price negotiation program?
Because generics are already subject to market competition. With multiple manufacturers producing the same drug, prices stay low without government intervention. The Inflation Reduction Act of 2022 specifically excludes generics from negotiation because they don’t need it-their pricing is already controlled by supply and demand, not monopolies.
How can I find out what my insurance really pays for my generic prescriptions?
You can’t always see it on your statement, but you can ask. If you’re covered through an employer, request a full breakdown of PBM contracts, including the acquisition cost of generics. If you’re an individual, compare the price you pay with cash prices on apps like GoodRx. If the cash price is lower than your insurance copay, your plan is likely using spread pricing. You might save money by paying cash instead.
Is there a movement to fix how generics are priced?
Yes. More employers are switching to “pass-through” pricing, where PBMs charge a flat fee instead of keeping the spread. In 2020, only 18% of large employers used this model. By 2024, that number rose to 42%. Legislation is also expected by 2026 to require PBMs to disclose the true acquisition cost of generic drugs. The goal is to end hidden profits and make pricing transparent.
