How Insurers Choose Which Generics to Cover: The Real Rules Behind Formulary Decisions

Every year, Americans fill over 4 billion prescriptions. Nearly 87% of them are generics. But have you ever wondered why your insurer covers one generic version of a drug but not another-even if they’re both the same active ingredient? It’s not random. It’s not arbitrary. It’s a cold, calculated system built to save money, reduce risk, and keep people on medication. And if you’ve ever been denied coverage for a generic you expected to be covered, you’ve hit the edge of that system.

It Starts with the P&T Committee

Behind every insurance formulary is a group of people most patients never hear about: the Pharmacy & Therapeutics (P&T) committee. These aren’t marketers or accountants. They’re usually pharmacists, physicians, and sometimes patient advocates. They meet regularly-monthly or quarterly-to review which drugs get added, removed, or moved around on the formulary.

Their job? To answer one question: Which generic drug gives the best balance of safety, effectiveness, and cost? They don’t pick based on brand recognition. They don’t pick because a sales rep gave them free lunch. They pick based on data.

The FDA says two generics are therapeutically equivalent if they contain the same active ingredient, dosage, strength, and route of administration. But insurers don’t stop there. They dig deeper. They look at real-world outcomes: How many patients had side effects? Did it work as well in older adults? Did it cause more hospital visits? One study found that even among FDA-approved generics, some had higher rates of patient discontinuation due to side effects-something the P&T committee tracks closely.

How Generics Are Tiers: The $0-$15 Rule

If you’ve ever looked at your insurance statement, you’ve seen the tiers. Tier 1. Tier 2. Tier 3. And if you’re lucky, your generic is in Tier 1.

That’s where 92% of Medicare Part D plans put all their generics. And it’s not just Medicare. UnitedHealthcare, Cigna, Humana, Blue Cross-all follow the same pattern. Tier 1 means the lowest copay: usually $0 to $15 for a 30-day supply. Compare that to a brand-name drug in Tier 3 or 4, which can cost $40 to $100 or more.

Why? Because generics cost 80-85% less than their brand-name equivalents. In 2019 alone, Medicare Part D saved $141 billion using generics. That’s not a rounding error. That’s enough to cover millions of prescriptions for people who otherwise couldn’t afford them.

But here’s the catch: not all generics are treated the same-even within Tier 1. Some insurers have a “preferred generic” list. That means they’ll cover one generic version at $5, but if you ask for another, even if it’s FDA-approved and chemically identical, they’ll make you pay $15. Why? Because the insurer negotiated a deeper discount with one manufacturer.

It’s not about quality. It’s about price.

The Three Rules Every Insurer Uses

When a new generic hits the market, the P&T committee doesn’t just add it. They test it against three filters:

1. Clinical Effectiveness - Does it work as well as the brand? Studies, patient data, and real-world outcomes are reviewed. If two generics are equally effective, cost wins.
2. Safety - Has it been linked to more side effects? Even a slightly higher rate of nausea or dizziness can disqualify a generic. One 2023 study found that certain generic versions of epilepsy drugs had slightly higher seizure recurrence rates in vulnerable populations-enough for insurers to delay coverage until more data came in.
3. Cost-Effectiveness - This is the big one. If Drug A and Drug B are identical in effect and safety, but Drug A costs $20 and Drug B costs $35? Drug A gets covered. Drug B? It might be excluded, or moved to a higher tier.

These aren’t vague guidelines. They’re documented policies. Blue Shield of California, Humana, and Cigna all publish them. The FDA’s approval is just the starting line. The real race is about outcomes and economics.

Why You Might Be Denied Coverage-Even for a Generic

You might think: “It’s a generic. It’s cheap. It should be covered.” But insurers don’t cover every generic that exists. There are hundreds of versions of common drugs like lisinopril or metformin. Why pick one over another?

Insurers often limit coverage to just one or two generics per drug. They do this to:

• Maximize bulk discounts from manufacturers
• Simplify pharmacy inventory and dispensing
• Reduce confusion for patients and pharmacists

So if your doctor prescribes “lisinopril,” and your plan only covers the version made by Teva, but your pharmacy only has the version from Mylan, you might get turned away. That’s not a pharmacy error. That’s a formulary restriction.

And here’s where it gets messy: some insurers require therapeutic substitution. That means your pharmacist can swap your brand-name drug for a generic-even if your doctor didn’t write it that way. In 78% of commercial plans, this happens automatically at checkout. But if you’ve had bad reactions to a specific generic before? You’re out of luck unless you file an exception.

What to Do When Your Generic Isn’t Covered

If your drug gets denied, you’re not stuck. You have rights.

First, ask your doctor to file an exception request. This isn’t a long process. You need to show:

• The covered generic caused side effects
• You tried it and it didn’t work
• You need a higher dose than your plan allows

Insurers must respond within three business days. If they don’t, coverage is automatically approved. For urgent cases (like heart or seizure meds), they have just one day.

The Patient Advocate Foundation found that 78% of people who appealed a denial eventually got coverage. But only 22% of patients even try. Most just give up-or pay out of pocket.

The Hidden Cost: Time and Frustration

Behind every denied claim is a doctor spending hours on paperwork. A 2022 survey found physicians spend an average of 13.3 hours per week just dealing with prior authorizations and formulary exceptions. That’s over half a workday. And for many, it’s the most frustrating part of their job.

Why? Because every insurer has different rules. One plan requires a letter from the doctor. Another needs lab results. A third demands a trial of a different generic first. No two systems are the same. That’s why 68% of doctors say navigating insurance rules is “moderate to severe” difficulty.

And transparency? Barely there. Only 37% of insurers publicly share their full formulary decision criteria. You can find your copay. You can’t find why they chose one generic over another.

What’s Changing in 2025?

The rules are shifting. The Inflation Reduction Act caps out-of-pocket drug costs at $2,000 a year for Medicare Part D starting in 2025. That means insurers can’t just push patients toward the cheapest drug anymore. They have to think about total cost-how many hospital visits, ER trips, or missed workdays a drug might cause.

Also, the FDA is speeding up approvals. The Generic Drug User Fee Amendments (GDUFA III) aim to cut approval times from 42 months to 10 months. That means more generics will hit the market faster. More options. More competition. More pressure on insurers to pick wisely.

But there’s a warning sign: drug shortages. As of October 2023, 78% of the 372 active drug shortages in the U.S. were generics. When a manufacturer can’t keep up, insurers scramble. They might switch to a different generic-or drop coverage entirely.

And then there’s the future: AI-driven personalized generics. Imagine a version of metformin tailored to your genes. Will insurers cover it? No one knows. P&T committees are still figuring out how to evaluate something that doesn’t exist yet.

Bottom Line: It’s Not About Cheap. It’s About Smart.

Insurers don’t pick generics because they’re cheap. They pick them because they’re the best tool for the job-when cost, safety, and effectiveness line up. The system works well for most people. Eighty-two percent of Medicare beneficiaries say they understand their generic drug costs clearly.

But it’s not perfect. When a patient has a bad reaction. When a doctor knows a specific version works better. When the cheapest option isn’t the right one-that’s when the system fails.

Know your rights. Ask for an exception. Push back. Your health isn’t a spreadsheet. But the system treating it like one is here to stay. And the only way to change it is to speak up.