How Insurers Choose Which Generics to Cover

When you pick up a prescription for a generic drug, you might assume it’s just a cheaper version of the brand-name medicine. But behind that simple swap is a complex, highly structured decision-making system used by insurance companies to decide exactly which generics they’ll pay for-and which ones they won’t. This isn’t random. It’s not based on who has the best marketing team. It’s a cold, calculated process driven by science, cost, and regulation-and it affects millions of people every day.

Why Insurers Even Care About Generics

Generics aren’t just cheaper. They’re massively cheaper. On average, a generic drug costs 80 to 85% less than its brand-name equivalent. That’s not a small difference. For insurers, that means billions in savings. From 2007 to 2019, Medicare Part D plans alone saved $1.67 trillion by using generics and biosimilars. In 2019, that annual savings hit $141 billion. That’s money that doesn’t go to drug companies-it stays in the system, keeping premiums lower and coverage wider.

But it’s not just about saving money. It’s about making sure patients get the right treatment without breaking the bank. If a generic works just as well as a brand-name drug-and it’s far less expensive-why wouldn’t an insurer cover it? The answer is: they almost always do.

The Formulary: The Rulebook for Coverage

Every insurance plan has a formulary-a list of drugs they agree to cover. It’s not a secret document. It’s published online, updated regularly, and often broken into tiers. Think of it like a pricing ladder.

Tier 1: Lowest cost. Almost always generic drugs. Copays? Usually $0 to $15 for a 30-day supply.

Tier 2: Sometimes brand-name drugs, sometimes higher-cost generics. Copays range from $20 to $50.

Tier 3 and 4: Specialty drugs, brand-name medications with no generic yet. Copays can hit $100 or more.

Medicare Part D plans follow this structure too. In fact, 92% of them use a 3-tier system where Tier 1 is reserved for generics only. Blue Shield of California, Humana, Cigna, UnitedHealthcare-all of them use this same model. It’s not coincidence. It’s industry standard.

Who Decides What Gets Covered?

The real decision-makers aren’t CEOs or claims adjusters. They’re the Pharmacy & Therapeutics (P&T) committees. These are groups of doctors, pharmacists, and health economists hired by insurers to review drugs and make coverage recommendations.

They don’t just look at price. They look at three things:

• Clinical effectiveness-Does the drug actually work? Is there solid evidence from studies?
• Safety-What are the side effects? How common are they? Has it been used safely in real patients for years?
• Cost-effectiveness-If Drug A and Drug B do the same thing, but Drug B is half the price? Drug B wins.

The FDA has to approve the generic first. That means it must contain the exact same active ingredient, work the same way in the body, and meet the same quality standards as the brand-name version. The P&T committee then decides whether to include it in the formulary-and where to put it.

Why Some Generics Get Rejected

You might think: if it’s FDA-approved, it should be covered. But that’s not always true. Here’s why some generics still get left out:

• Too many similar options-If five different generic versions of a drug are already on the formulary, adding a sixth might not make sense unless it’s significantly cheaper or better.
• Supply chain issues-If a generic manufacturer has frequent shortages (and 78% of current drug shortages are generics), insurers may avoid them until stability improves.
• Therapeutic substitution rules-Some insurers require you to try the cheapest generic first, even if your doctor prescribed something else. If that generic causes side effects, you can appeal-but the process isn’t always smooth.

A 2023 Drug Topics survey found that 31% of patients reported adverse reactions after being switched to a different generic than what they’d used before. That’s not common-but it happens enough that insurers have to build in exceptions.

What Happens When a Drug Isn’t Covered?

If your doctor prescribes a generic that’s not on your plan’s formulary, you’re not stuck. You can file an exception request.

Here’s what you need to show:

• The drug you were prescribed caused harmful side effects.
• You tried a similar drug on the formulary and it didn’t work.
• The formulary drug requires a dosage higher than what’s allowed under your plan’s rules.

Insurers have to respond within three business days. For urgent cases-like if you’re about to run out of medication-they must respond in one day. If they don’t respond? The request is automatically approved.

The Patient Advocate Foundation found that 43% of patients get denied at first-but 78% eventually get coverage after appealing. That’s a strong safety net.

Where the System Falls Short

The system works well for most people. But it’s not perfect.

One big problem? Lack of transparency. Only 37% of insurers publicly share the full criteria their P&T committees use to make decisions. That means patients and doctors often don’t know why a drug was excluded until they’re already in the middle of a coverage battle.

Doctors are also stretched thin. A 2022 American Medical Association survey found physicians spend an average of 13.3 hours per week just dealing with prior authorizations and formulary exceptions. That’s over three full workdays a month spent on paperwork-not patient care.

And then there’s the rise of complex generics. Drugs like inhalers, insulins, and injectables are harder to copy. The FDA is trying to speed up approval for these, but it’s slow. That means fewer generic options in critical areas-and more pressure on insurers to make tough calls.

What’s Changing in 2025?

The Inflation Reduction Act of 2022 capped Medicare Part D out-of-pocket costs at $2,000 per year starting in 2025. That’s huge. It means patients won’t be forced to skip doses because they can’t afford their meds.

But here’s the twist: insurers are now shifting their focus. With patients paying less out of pocket, insurers are doubling down on managing total drug spend. That means even more pressure to push high-volume generics-especially the cheapest ones.

Also, preferred pharmacy networks are becoming standard. Medicare Part D plans are now required to offer discounts on generics through specific pharmacies. That could save beneficiaries over $1,000 a year on prescriptions.

What You Can Do

If you’re on a plan that doesn’t cover a generic you need:

• Ask your doctor if there’s an alternative on the formulary.
• Request a formulary exception-you have the right to appeal.
• Check if your pharmacy offers a cash price lower than your copay. Sometimes, paying out of pocket is cheaper.
• Use your insurer’s online formulary tool. Most let you search by drug name and see exactly which tier it’s on.

And if you’re a patient who’s been switched to a different generic and had a bad reaction? Document it. Keep a log of symptoms. That’s your evidence when you appeal.

The Bigger Picture

The U.S. generic drug market is worth over $80 billion-and growing. By 2027, 95% of prescriptions will have a generic alternative. That’s up from 91% today.

Insurers aren’t trying to deny care. They’re trying to make care affordable. Generics are the backbone of that effort. But the system only works if it’s fair, transparent, and flexible enough to handle real-world patient needs.

Right now, it mostly does. But as drugs get more complex and patient expectations rise, the pressure on P&T committees will only grow. The goal remains the same: get the right medicine to the right person at the right price. The challenge is making sure no one gets left behind in the process.