Pharmacy Reimbursement Models: How Laws Shape Generic Drug Payments

When you pick up a generic prescription at the pharmacy, you might think the price is simple: cheaper than the brand, end of story. But behind that low copay is a tangled web of federal and state laws, payment formulas, and corporate contracts that determine exactly how much the pharmacy gets paid-and whether they can even afford to fill your script. This isn’t just about drug prices. It’s about who wins, who loses, and why some pharmacies are barely scraping by while others thrive.

How Generic Drugs Are Paid For (And Why It’s Not What You Think)

Pharmacies don’t get paid the same way for every drug. For brand-name medications, reimbursement often uses the Average Wholesale Price (AWP)-a list price set by manufacturers that has little to do with what pharmacies actually pay. But for generics? That’s where things get real. Most plans use something called Maximum Allowable Cost (MAC) lists. These are price caps set by pharmacy benefit managers (PBMs) based on what they believe is the lowest price a pharmacy can buy a generic drug for. If a pharmacy pays $1.20 for a 30-day supply of lisinopril and the MAC is $1.00, they lose 20 cents on that script. No markup. No profit. Just a loss.

This system was designed to save money for insurers and patients. And it works-up to a point. But it’s created a dangerous imbalance. Independent pharmacies, especially in rural areas, often buy generics from distributors at higher prices than big chains. They’re stuck between a MAC rate that doesn’t reflect their real cost and the pressure to stay in network. In 2023, the average profit margin on generic drugs for independent pharmacies was just 1.4%. In 2018, it was 3.2%. That’s not a trend. That’s a slow squeeze.

The Hidden Players: PBMs and the Spread That Breaks Pharmacies

You’ve probably never heard of pharmacy benefit managers (PBMs), but they control 80% of all prescription claims in the U.S. CVS Caremark, Express Scripts, and OptumRX are the big three. They negotiate with drugmakers, set reimbursement rates, and decide which drugs are covered under your plan. Their revenue doesn’t come from insurance premiums-it comes from the spread.

Here’s how it works: Your insurer agrees to pay $10 for a generic drug. The pharmacy gets paid $7. The PBM keeps the $3 difference. That’s the spread. And until 2018, they were legally allowed to hide this from you. Pharmacists couldn’t tell you that paying cash-$5 for the same drug-would be cheaper than using your insurance. That’s called a gag clause. It’s banned now, but the spread still exists. And it’s why some plans make you pay more out-of-pocket for generics than you would if you paid cash.

PBMs also push pharmacies to use specific generics-even when others are cheaper. Why? Because they’ve struck deals with manufacturers for rebates. The more they steer you toward a certain drug, the more money they make. It’s not about what’s best for you. It’s about what’s best for their bottom line.

Medicare Part D: A System Built for Savings-But Not Always for Access

Medicare Part D covers nearly 51 million people. It’s supposed to make drugs affordable. But the reality is messier. Part D plans have formularies-lists of covered drugs-and they’re divided into tiers. Generics usually sit on Tier 1, with the lowest copay. Sounds good, right?

Except here’s the catch: 28% of Part D plans required prior authorization for at least one generic drug in 2022. That means your doctor has to jump through hoops just to get you a $2 medication. Why? Because the plan wants to make sure you’ve tried another, slightly more expensive generic first. Or because the drug isn’t on their preferred list. Or because the PBM got a better rebate on a different version.

The new Medicare $2 Drug List Model is trying to fix this. Starting in 2025, it will create a standardized list of about 100-150 low-cost, high-use generics-like metformin, levothyroxine, and atorvastatin-with a flat $2 copay for everyone. No formulary tiers. No prior auth. No surprise bills. It’s modeled after what Walmart and Costco already do: fixed low prices for essential meds. If it works, it could become the new standard.

State Laws Are Changing the Game

While federal rules set the baseline, states are stepping in. As of 2023, 44 states passed laws regulating how PBMs reimburse pharmacies. Some require PBMs to pay pharmacies at least what they paid for the drug. Others ban spread pricing entirely. A few even mandate that pharmacists be paid a minimum dispensing fee-not just a percentage of the drug cost.

In California, for example, pharmacies can now challenge MAC rates if they prove the listed price is below their actual acquisition cost. In New York, PBMs must disclose their reimbursement formulas to pharmacies. These laws don’t fix everything, but they give pharmacies a fighting chance.

Meanwhile, Medicaid programs use Preferred Drug Lists (PDLs) to steer patients toward cheaper generics. Each state’s Pharmacy and Therapeutics Committee decides which drugs get preferred status. That means the same generic drug might be free in one state and have a $5 copay in another-depending on which manufacturer gave the state the best rebate.

Why Authorized Generics Are Hurting Competition

Here’s one of the most confusing parts: sometimes, the brand-name company itself releases a “generic” version of its own drug. That’s called an authorized generic. It looks like a generic. It’s sold under a different label. But it’s made by the same company, in the same factory.

Why do they do this? To block real generic competitors. If the brand-name maker releases an authorized generic the day the patent expires, it can capture 80% of the market before any other generic even gets to shelves. That’s not competition-it’s a legal loophole. Studies show this practice delays the entry of multiple generic competitors, keeping prices higher than they should be.

The FDA’s Generic Drug User Fee Amendments (GDUFA) tried to fix this by lowering fees for small generic manufacturers. But big companies still have the capital to flood the market with authorized versions before anyone else can respond.

What This Means for You

If you’re on Medicare or have insurance, here’s what you need to know:

• Always ask your pharmacist: “Is this cheaper if I pay cash?” Even if you have insurance, paying out-of-pocket for common generics can save you 50-80%.
• Check your plan’s formulary. If your generic isn’t on Tier 1, ask your doctor if there’s an alternative that is.
• If you’re denied a generic drug, appeal. You have the right to challenge prior authorization denials.
• Use mail-order pharmacies or big-box retailers like Costco. They often have better pricing on generics than local pharmacies.
• Sign up for Medicare’s Extra Help program if you qualify. In 2024, it caps generic copays at $4.50.

The Future: Value-Based Payments and the End of Fee-for-Service

Right now, pharmacies are paid per prescription. That’s called fee-for-service. It rewards volume, not outcomes. But the system is shifting. The CMS Innovation Center is testing value-based payment models-where pharmacies get paid based on how well patients stick to their meds, not how many scripts they fill.

Imagine a pharmacy getting paid extra if patients taking metformin for diabetes see better blood sugar control. Or if patients on warfarin have fewer hospital visits. That’s the future. It’s still years away, but it’s coming. And when it does, pharmacies will be measured on health outcomes-not just how much they paid for a pill.

For now, the system is still broken. But awareness is growing. Patients are asking more questions. Pharmacies are pushing back. And lawmakers are finally starting to listen.