Pharmacy Reimbursement: How Generic Substitution Impacts Pharmacies and Patients

When a pharmacist hands you a generic pill instead of the brand-name version, it’s not just a simple swap. Behind that decision is a complex financial system that determines how much the pharmacy gets paid, how much you pay out of pocket, and who makes money in the process. In 2025, over 90% of prescriptions filled in the U.S. are for generic drugs. That’s up from just 33% in 1993. But here’s the catch: the more generics a pharmacy dispenses, the more it risks losing money - not because generics are cheap, but because how they’re paid for is broken.

How Pharmacies Get Paid for Generics

Pharmacies don’t make money because generics are cheaper. They make money because of the gap between what they pay for the drug and what they’re reimbursed. For brand-name drugs, reimbursement used to be based on the Average Wholesale Price (AWP), a number that had little to do with actual cost. Today, that’s mostly gone. For generics, reimbursement is tied to Maximum Allowable Cost (MAC) lists - a list of prices set by Pharmacy Benefit Managers (PBMs) that say, "This is the most we’ll pay for this generic."

Here’s how it works: A pharmacy buys a 30-day supply of generic lisinopril for $2.50. The MAC list says the PBM will reimburse $5.50. The pharmacy keeps $3.00 as profit. Sounds fair, right? But what if the PBM sets the MAC at $5.50 because they’re buying the same drug from a distributor for $3.00 - and then charging the insurance plan $8.00? That $5.00 difference is called "spread pricing," and it’s where PBMs make billions. The pharmacy gets $5.50, but the real cost to the system is $8.00. The patient pays their $5 copay, and the insurer pays the rest. The pharmacy never sees the full picture.

Why Generic Substitution Isn’t Always Cheaper

Generic substitution sounds like a win-win: same drug, lower price. But not all generics are equal. Two drugs in the same therapeutic class - say, two different brands of metformin - can have wildly different prices, even though they do the exact same thing. Studies show that some generic versions cost 20 times more than others in the same class. Why? Because PBMs put the higher-priced version on their formulary. It’s not about clinical effectiveness. It’s about profit margins.

Take a case from 2023: A patient was switched from a $1.20 generic metformin to a $24.50 generic version because that’s the one the PBM’s MAC list favored. The pharmacy made more money on the $24.50 version - even though the cheaper one was available, stocked, and just as safe. The patient didn’t notice. The doctor didn’t know. The insurer paid more. The only winner was the PBM.

This isn’t rare. It’s standard. PBMs have financial incentives to push higher-priced generics because they profit from the spread. The pharmacy gets paid, but the system loses. Patients end up paying higher copays if their plan uses a tiered system. And if the lower-cost generic isn’t on the MAC list, the pharmacy can’t even offer it without losing money.

Cost-Plus Reimbursement: A Better Model?

Some states and payers have tried a different approach: cost-plus reimbursement. Instead of setting a fixed MAC, they pay the pharmacy the actual cost of the drug plus a fixed dispensing fee - say, $4.50. This removes the spread pricing loophole. It’s transparent. It rewards pharmacies for efficiency, not for pushing expensive generics.

But here’s the problem: most PBMs hate it. Why? Because it cuts into their profits. Under cost-plus, if a generic costs $1.00, the pharmacy gets $5.50 total. No room for hidden markups. If the drug costs $3.00, they still get $7.50. The pharmacy doesn’t benefit from price inflation. So PBMs resist. They lobby. They threaten to drop pharmacies from their networks if they don’t agree to MAC-based contracts.

Independent pharmacies are caught in the middle. They need the volume from PBM contracts to survive. But those contracts often force them to stock expensive generics just to get paid. A 2022 study found that pharmacies using cost-plus models had lower generic substitution rates - not because pharmacists didn’t want to substitute, but because the financial incentive to push high-cost generics was gone. The result? More patients got the cheapest, clinically appropriate option. The system saved money. But the PBMs lost leverage.

The Consolidation Crisis

Since 2018, over 3,000 independent pharmacies have closed. Why? Narrow margins. Unpredictable reimbursement. PBMs controlling 80% of the market mean they set the rules. Small pharmacies can’t negotiate. They can’t afford to refuse a contract. So they play along - even when it means stocking a $20 generic instead of a $2 one.

Meanwhile, the three big PBMs - CVS Caremark, Express Scripts, and OptumRx - have grown into giants. They own pharmacies. They own insurers. They own the MAC lists. It’s a closed loop. And the result? Less competition. Fewer choices for patients. And less transparency.

Pharmacists know this. They see patients who can’t afford their meds because the generic they were switched to is still too expensive. They see patients who get confused when they’re told their "generic" costs more than the brand. They want to help. But the system won’t let them.

Therapeutic Substitution: The Real Savings Opportunity

Most people think generic substitution means swapping one brand for another brand’s generic. But the real savings come from therapeutic substitution - switching from a brand-name drug to a different generic drug in the same class that’s cheaper and just as effective.

For example: switching from a brand-name statin to a generic one might save $50 a month. Switching from a brand-name statin to a different generic statin that’s $10 a month? That saves $150. The Congressional Budget Office estimated that in 2007, therapeutic substitution could have saved $4 billion - ten times more than standard generic substitution.

But PBMs rarely incentivize this. Why? Because it’s harder to control. Therapeutic substitution requires clinical judgment. It requires doctors to approve. It requires formularies that prioritize cost-effectiveness, not profit. Most PBM formularies don’t. They’re built to maximize spread, not savings.

What’s Changing in 2025?

There’s pressure. The Federal Trade Commission is investigating PBM spread pricing. The Inflation Reduction Act now requires Medicare Part D to disclose drug pricing. Fifteen states have created Prescription Drug Affordability Boards that set Upper Payment Limits - meaning they cap how much insurers can pay for certain drugs. That’s pushing PBMs to use lower-cost generics.

Some health plans are starting to move toward value-based reimbursement. Instead of paying per pill, they pay based on outcomes. If a patient stays healthy because they’re on the right, affordable drug, the pharmacy gets a bonus. That’s the future. But it’s slow. Most pharmacies still operate under the old model: dispense as many generics as possible, hope the MAC list pays well, and pray the dispensing fee covers rent.

What Patients and Pharmacists Can Do

Patients: Always ask. "Is there a cheaper generic?" Even if your copay is low, you might be paying more than necessary. Ask your pharmacist to check the actual cost before you leave.

Pharmacists: Use your clinical authority. If a patient is on a high-cost generic and a lower-cost alternative exists, speak up. Document it. Push back on PBM formularies. Join advocacy groups like the National Community Pharmacists Association. Your voice matters.

System change won’t come from one policy. It’ll come from pressure - from patients who demand transparency, from pharmacists who refuse to be silent, and from payers who realize that the current system is unsustainable.

Generic substitution was supposed to save money. It has - but only for the middlemen. The real savings are still out there. We just need to fix the way we pay for them.