Pharmacy Reimbursement Models: How Laws Shape Generic Drug Payments

When you pick up a generic prescription at the pharmacy, you might assume the price is simple: cheaper than the brand, end of story. But behind that low copay is a web of federal and state laws, complex reimbursement models, and financial incentives 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 controls the money, how laws shape access, and why some pharmacies are barely breaking even just to give you the medication you need.

How Generic Drugs Got Their Price Tag

The modern system for paying for generic drugs started with the Hatch-Waxman Act of 1984. Before that, generic manufacturers faced the same costly approval process as brand-name drugs. Hatch-Waxman changed that by creating the ANDA pathway-letting generic makers prove their drugs were bioequivalent without repeating expensive clinical trials. The goal? Lower prices through competition. And it worked. Today, generics make up 90% of all prescriptions filled in the U.S., but only 23% of total drug spending.

But here’s the catch: just because generics are cheaper doesn’t mean pharmacies get paid enough to cover their costs. Reimbursement isn’t based on what the pharmacy actually paid for the pills. It’s based on outdated formulas tied to old price lists like Average Wholesale Price (AWP) or, more commonly now, Maximum Allowable Cost (MAC). MAC sets a cap on what insurers will pay for a generic drug, often lower than what the pharmacy paid to buy it. If a pharmacy buys a 30-day supply of metformin for $8 but the MAC is $5, they lose $3 on that prescription. No markup. No profit. Just a loss.

Medicare Part D and the Hidden Costs of Formularies

Medicare Part D covers nearly 51 million seniors and people with disabilities. It’s supposed to help with drug costs, but the system is built around formularies-lists of approved drugs-controlled by Pharmacy Benefit Managers (PBMs). These are the middlemen between insurers, drugmakers, and pharmacies. PBMs negotiate rebates with manufacturers, decide which drugs get preferred status, and set reimbursement rates.

For generics, Part D plans often place them in lower tiers with lower copays-$4 or $5 instead of $40 for a brand. Sounds good, right? But here’s what’s hidden: many plans require prior authorization just to fill a generic. In 2022, 28% of Part D plans required prior auth for at least one generic drug. That means your pharmacist has to call your doctor, wait for paperwork, and sometimes you get delayed or denied the cheaper option. The goal? To steer you toward a drug the PBM gets a bigger rebate on-even if it’s not the best clinical choice.

And then there’s the “donut hole.” Even though generics are cheaper, if your total drug spending hits a certain threshold, you enter a coverage gap where you pay full price until you hit the catastrophic threshold. That hits low-income seniors hardest, especially if their plan doesn’t cover enough generics.

Medicaid’s Preferred Drug Lists and State-Level Control

Medicaid, covering 85 million Americans, operates differently. Each state runs its own program and creates a Preferred Drug List (PDL). The state’s Pharmacy and Therapeutics Committee picks which drugs are preferred-and which aren’t. If a generic isn’t on the list, the pharmacy might not get paid at all unless the doctor jumps through hoops to get prior authorization.

States also use the Medicaid Drug Rebate Program (MDRP), which forces drugmakers to pay rebates to both federal and state governments. Those rebates help lower the overall cost of drugs-but they’re negotiated behind closed doors. Manufacturers often raise list prices to offset the rebates they give to PBMs, creating a cycle where the sticker price goes up even as the net price drops. That doesn’t help patients at the counter, but it does affect what pharmacies are reimbursed.

The PBM Problem: Spread Pricing and Gag Clauses

PBMs don’t just negotiate rebates. They also make money through “spread pricing.” Here’s how it works: Your insurer agrees to pay the PBM $15 for a generic drug. The PBM tells the pharmacy they’ll be paid $10. The PBM pockets the $5 difference. That’s spread pricing-and it’s been a major source of controversy.

For years, PBMs used “gag clauses” to stop pharmacists from telling you that paying cash might be cheaper than using your insurance. A 2018 federal law banned those clauses, but the damage was done. Many patients still don’t know they could pay $4 out-of-pocket for a 30-day supply of lisinopril at Walmart or Costco-far less than their $10 copay.

Independent pharmacies suffer the most. A 2023 report from the National Community Pharmacists Association found that the average profit margin on generic drugs had dropped to just 1.4%, down from 3.2% in 2018. Some pharmacies are losing money on every generic they dispense. That’s why so many independent pharmacies are closing or being bought out by big chains.

The New $2 Drug List: A Step Toward Simplicity

In 2025, CMS is testing a new model called the Medicare $2 Drug List. It’s simple: pick about 100 to 150 clinically important generic drugs and cap the patient copay at $2. No formulary tiers. No prior auth. No surprise costs. The drugs are chosen based on clinical guidelines, how often they’re used, and how many manufacturers make them.

This model is inspired by grocery store pharmacy programs like Walmart’s $4 list. But it’s being tailored for Medicare Part D. If it works, it could be expanded nationwide. It’s not a cure-all-PBMs still control the supply chain-but it cuts through the noise. For seniors, it means less confusion, fewer skipped doses, and more predictable costs.

What’s Next for Generic Reimbursement?

The Inflation Reduction Act of 2022 capped insulin at $35 a month and will cap total out-of-pocket drug spending at $2,000 in 2025. That’s a big win. But it doesn’t fix the underlying reimbursement model. Generic drug prices are still falling-around 5-7% per year-and pharmacies are being squeezed harder.

Some states are stepping in. As of early 2025, 44 states have passed laws regulating PBM practices, including requiring transparency in spread pricing and banning unfair reimbursement terms. More are coming.

The biggest threat to generic access isn’t the drugmakers-it’s the system. When pharmacies can’t make money on generics, they stop stocking them. When PBMs control which drugs get paid for, patients lose choice. And when laws don’t keep up with the financial reality, the people who need the cheapest meds pay the highest price-in time, stress, and skipped doses.

What You Can Do

- Ask your pharmacist: “Is this generic cheaper if I pay cash?” Many times, it is.

- Check discount programs: GoodRx, SingleCare, and pharmacy loyalty programs often beat insurance prices for generics.

- Know your formulary: If you’re on Medicare Part D, review your plan’s formulary each year. A small change in tier placement can cost you hundreds.

- Speak up: If your generic is denied or delayed, file an appeal. You have rights under federal law.

The system is broken-but it’s not unfixable. Real change comes from transparency, competition, and laws that protect pharmacies as much as patients. Until then, knowing how reimbursement works is your best tool for getting the drugs you need at a price you can afford.