Negotiated rebates on generics: what insurance actually pays

When you fill a prescription for a generic drug-say, metformin for diabetes or lisinopril for high blood pressure-you might assume the insurance company pays a small, straightforward amount. But here’s the truth: what insurance actually pays for generics isn’t what you see on your receipt, and it’s not even what the pharmacy gets paid. The real cost is buried in layers of contracts, hidden fees, and financial incentives that rarely benefit you or your plan.

Generics don’t work like brand-name drugs

Brand-name drugs often come with big rebates. Manufacturers pay pharmacy benefit managers (PBMs) hundreds of millions in kickbacks to get their drugs listed on insurance formularies. These rebates can be 30% to 70% of the list price. That’s why you’ll see a brand-name drug with a $200 list price, but your insurer only pays $60 after the rebate. It looks like a win.

But generics? They don’t play that game. There’s no rebate system worth talking about. Why? Because there are 20 companies making the exact same pill. Competition drives the price down to pennies. A 100-pill bottle of generic atorvastatin might cost $4 at the pharmacy. If a manufacturer tried to offer a 20% rebate on that, it’d be 8 cents. Not worth the paperwork. So instead of rebates, PBMs use something else: spread pricing.

Spread pricing: the hidden tax on generics

Here’s how it works. Your insurer thinks it’s paying $8.50 for that $4 generic. The pharmacy is told to accept $4. The PBM pockets the $4.50 difference. That’s spread pricing. It’s not a rebate. It’s not a discount. It’s a profit margin hidden inside your insurance plan.

You won’t see this on your explanation of benefits. You won’t see it on your pharmacy receipt. But it’s real. In 2022, the U.S. Department of Health and Human Services found the average spread on generic prescriptions was $4.73 per fill. Multiply that by millions of fills a year, and you’re talking billions in hidden profits.

Employers who self-insure are especially affected. One Fortune 500 company discovered their PBM was charging $8.50 per generic while paying pharmacies only $4.25. They had no idea. No disclosure. No audit rights. Just a line item on a monthly bill they assumed was fair.

Why PBMs don’t want you to use generics

It sounds backwards, but PBMs often have a financial reason to avoid generics. If a brand-name drug has a 60% rebate, and a generic has no rebate at all, the PBM makes more money steering you toward the brand. That’s not a typo.

Rightway Healthcare documented cases where PBMs excluded a $0.15-per-dose generic in favor of a $5-per-dose brand-name drug with a 60% rebate. Even after the rebate, the net cost was higher. But the PBM’s profit? It went up. The patient paid more. The insurer paid more. Everyone lost-except the PBM.

This isn’t rare. A 2023 Commonwealth Fund report found PBMs design formularies to favor high-rebate drugs-even when lower-cost generics are available. They’re not optimizing for your health or your wallet. They’re optimizing for their bottom line.

What insurance really pays for generics

Let’s break it down with real numbers:

• Wholesale Acquisition Cost (WAC): $4.00 (what the pharmacy pays the manufacturer)
• Pharmacy reimbursement: $4.00 (what the pharmacy gets paid by the PBM)
• Insurer payment: $8.50 (what your plan is billed)
• PBM profit (spread): $4.50
• Your copay: $3.00 (if you have one)

So who pays what? You pay $3. Your insurer pays $5.50 ($8.50 minus your $3). But the pharmacy only gets $4. The PBM keeps $4.50. The manufacturer gets $4. The net cost to the system? $7.50. But your insurer thinks they paid $8.50. And you think you’re getting a bargain.

That’s the illusion.

Why transparency is almost impossible

Most insurance plans don’t know what they’re really paying. PBMs hide the true cost of generics in complex contracts. Even large employers with legal teams struggle to audit their PBM agreements. A 2023 survey by the National Business Group on Health found 68% of large employers couldn’t determine the actual net cost of generic drugs.

Why? Because contracts are written in legalese. Terms like “administrative fee,” “dispensing fee,” and “network discount” mask the spread. You’re not just paying for the drug-you’re paying for a middleman’s profit, and you don’t know how much.

And when you ask for details? PBMs say, “It’s proprietary.”

What’s changing-and what’s not

There’s pressure to fix this. The No Surprises Act of 2020 started requiring some transparency. The Biden administration’s 2024 executive order asked HHS to examine practices that limit generic use. And in 2024, 42% of large employers moved to pass-through pricing-where PBMs charge a flat fee instead of keeping the spread.

But change is slow. The three biggest PBMs-CVS Caremark, Express Scripts, and OptumRx-control 80% of the market. They have no incentive to make things simple. In fact, they’ve spent millions lobbying against transparency laws.

Meanwhile, the Inflation Reduction Act of 2022 explicitly excluded generics from Medicare drug price negotiation. Why? Because lawmakers assumed competition already keeps prices low. But that ignores the PBM middleman. The real problem isn’t the manufacturer’s price-it’s what gets added on top.

What you can do

If you’re an individual with private insurance, your power is limited. But if you’re on an employer plan-or you’re an employer yourself-there are steps:

1. Ask your benefits provider: “Do you use spread pricing on generics?”
2. Request a full audit of your PBM contract. Look for terms like “administrative fee,” “network discount,” or “rebate pass-through.”
3. Push for pass-through pricing. That means your plan pays the pharmacy’s actual cost plus a fixed fee-no hidden cuts.
4. Use tools like GoodRx or SingleCare to compare cash prices. Sometimes paying cash is cheaper than using insurance.

If you’re a patient, ask your pharmacist: “Is there a lower-cost option?” Sometimes the generic isn’t even on your plan’s formulary because the PBM prefers a brand with a rebate.

The bottom line

Generics are supposed to save money. And they do-when the system works. But the rebate model that works for brand-name drugs doesn’t apply here. Instead, PBMs profit from opacity. What insurance pays for generics isn’t the price on the bottle. It’s not even what the pharmacy receives. It’s what the PBM decides to charge-and keep.

The system isn’t broken. It’s working exactly as designed-for the middlemen, not for patients or payers. Until transparency becomes law, the real cost of your generic prescription will stay hidden. And you’ll keep paying for it-without knowing how much.