Pharmacy Reimbursement: How Generic Substitution Impacts Pharmacies and Patients Financially

When a pharmacist hands you a generic pill instead of the brand-name version, it’s not just a simple swap. Behind that small change is a complex financial system that determines how much the pharmacy gets paid, how much you pay at the counter, and who actually profits from the switch. In the U.S., generic substitution now covers over 90% of prescriptions, but the way pharmacies are reimbursed for these drugs is anything but straightforward-and it’s reshaping who can stay in business and who gets left behind.

How Pharmacies Get Paid for Generics

Pharmacies don’t make money by selling drugs at retail. They’re paid by insurance plans, Medicare, Medicaid, or Pharmacy Benefit Managers (PBMs) to dispense medications. The payment comes in two parts: the cost of the drug itself and a flat dispensing fee for the service. For brand-name drugs, reimbursement used to be based on the Average Wholesale Price (AWP), a list price that often had little to do with what the pharmacy actually paid. But for generics, the system changed.

Today, most generic drugs are reimbursed using Maximum Allowable Cost (MAC) lists. These are secret price caps set by PBMs that tell pharmacies the most they’ll get paid for a specific generic drug. The problem? These lists aren’t standardized. One PBM might pay $2.50 for a 30-day supply of lisinopril, while another pays $5.00 for the exact same pill. And pharmacies rarely know how those numbers are calculated.

This opacity creates a hidden profit engine. PBMs buy generics in bulk at low prices-sometimes under $1 per script-and then reimburse pharmacies at higher rates, keeping the difference as “spread pricing.” That spread can be huge. In some cases, the PBM charges the insurer $15 for a generic that only cost them $1.50 to acquire. The pharmacy gets paid $5, and the PBM pockets $10. The patient pays their copay, and no one questions why the same drug costs different amounts depending on who’s paying.

Why Pharmacists Are Caught in the Middle

On paper, generics should be a win for everyone. They’re cheaper, just as effective, and widely available. But for pharmacies, the financial incentives are twisted. Gross margins on generic drugs average 42.7%, compared to just 3.5% for brand-name drugs. Sounds great, right? Not when your reimbursement is capped.

Cost-plus reimbursement-where pharmacies get paid a fixed percentage above what they paid for the drug-is the most transparent model. But it’s rare. Most pharmacies are stuck with MAC-based payments, which don’t reflect their actual acquisition costs. If a pharmacy buys a generic for $1.80 but the MAC is $2.00, they make a 10-cent profit. If the MAC drops to $1.50, they lose money on every script. Many independent pharmacies now operate on razor-thin margins, sometimes less than 2 cents per generic prescription after accounting for labor, rent, and overhead.

This is why over 3,000 independent pharmacies shut down between 2018 and 2022. The ones that survive are often part of large chains or have negotiated special contracts with PBMs. But even those contracts come with strings attached. Many now include Generic Effectiveness Rates (GERs), which limit total spending on generics over time. If a pharmacy dispenses too many high-cost generics, the PBM reduces future reimbursements. So pharmacists are pressured to pick the cheapest option-even if it’s not the most clinically appropriate.

The Myth of the “Cheapest” Generic

Not all generics are created equal-even when they’re the same drug. PBMs often place higher-priced generic versions on their formularies, not because they’re better, but because they create bigger spreads. Research shows that when a PBM substitutes one generic for another in the same therapeutic class, the price difference can be over 20 times. For example, one manufacturer’s generic version of metformin might cost $1.20, while another’s costs $25. Both are FDA-approved. Both work the same. But the PBM gets paid more on the $25 version, and the pharmacy gets reimbursed more-until the MAC drops next month.

Even dosage forms matter. A 10mg tablet might be reimbursed at $3, while the 20mg tablet-same drug, same manufacturer-is reimbursed at $15. Why? Because it’s a different product code. PBMs treat them as separate drugs, even though the patient only needs one pill instead of two. This isn’t an accident. It’s a design flaw built into the system.

Therapeutic substitution-switching a brand-name drug for a different generic drug in the same class-offers even bigger savings. A 2007 Congressional Budget Office study found that switching just seven classes of brand-name drugs to cheaper generics could save $4 billion. But PBMs rarely incentivize this. They prefer to stick with the same drug, just swap the manufacturer, because it’s easier to control and more profitable.

Who Benefits? Who Loses?

The big winners in this system are the three PBMs that control 80% of the market: CVS Caremark, Express Scripts, and OptumRx. They negotiate prices, set MAC lists, and dictate reimbursement rules. They don’t pay for the drugs-they just move money around and take a cut. Meanwhile, pharmacies are squeezed. Patients pay copays based on the inflated reimbursement rate, not the real cost. And insurers? They’re often unaware of how much they’re overpaying because the pricing is hidden.

Patients with high-deductible plans or no insurance get hit hardest. They pay the full cash price at the counter, which is often based on the same inflated MAC rate. So even if the pharmacy paid $1 for the drug, the patient might pay $15 because that’s what the PBM says the “list price” is. It’s a system designed to confuse and extract.

And it’s getting worse. As PBMs consolidate power, they’re pushing for even stricter reimbursement controls. Some now require pharmacies to stock only the lowest-cost generic-even if the patient has been stable on a different version for years. Switching can lead to side effects, confusion, and missed doses. But the pharmacy has no choice. If they don’t comply, they get penalized or dropped from the network.

What’s Changing? And What Could Help?

Pressure is building. The Federal Trade Commission launched investigations into PBM spread pricing in 2023. The Inflation Reduction Act of 2022 forced Medicare Part D to disclose drug pricing, and some of those rules may soon apply to commercial plans. Fifteen states have created Prescription Drug Affordability Boards that set Upper Payment Limits (UPLs) to cap how much can be charged for certain drugs. These boards could force PBMs to lower MAC lists and reduce spreads.

But change is slow. Pharmacies still need to survive. One solution is shifting to value-based reimbursement-paying pharmacies for outcomes, not just pills dispensed. Another is requiring full transparency: PBMs must disclose how MAC lists are calculated and what they pay for each drug. Some states are already trying this. In Minnesota, pharmacists can now access real-time acquisition costs, helping them push back on unfair MAC rates.

For patients, the best move is to ask: “Is there a cheaper generic available?” or “Can I get this drug for less if I pay cash?” Many pharmacies can run a cash price check and find a lower cost than your copay. It’s not perfect, but it’s a way to fight back in a system rigged to hide the truth.

What’s Next for Pharmacy Reimbursement?

The current model is unsustainable. Independent pharmacies are disappearing. Patients are paying more than they should. And the savings from generics aren’t reaching the people who need them most. The system was built to control costs, but it’s created a new kind of cost: trust.

Looking ahead, the next five years will likely see more state-level reforms, tighter FTC oversight, and pressure on PBMs to stop hiding profits behind opaque pricing. Pharmacies that survive will be those that demand transparency, partner with patients, and refuse to be passive players in a broken system.

Generic substitution isn’t the problem. It’s the reimbursement model that turns a public health win into a corporate profit machine. Fix the payment system, and you fix the access. Until then, the real cost of a generic pill isn’t on the label-it’s in the fine print.