Negotiated Rebates on Generics: What Insurance Actually Pays for Generic Drugs

When you fill a prescription for a generic drug like lisinopril or metformin, you might think the insurance company pays a small, straightforward amount. But the truth is far more complicated. The money that flows from your insurer to the pharmacy doesn’t tell the whole story. In fact, what insurance actually pays for generics is often hidden behind layers of deals, fees, and secret pricing arrangements that most patients - and even many employers - never see.

Generics Don’t Work Like Brand-Name Drugs

Brand-name drugs come with big rebates. Manufacturers pay pharmacy benefit managers (PBMs) hundreds of millions in rebates to get their drugs placed on insurance formularies. These rebates can be 30% to 70% of the list price. But generics? They’re different. Because multiple companies make the same generic drug, prices are already low. There’s no need for big rebates - and in most cases, there aren’t any at all.

Instead of rebates, PBMs make money on generics through something called spread pricing. Here’s how it works: Your insurer agrees to pay the pharmacy, say, $8.50 for a 30-day supply of generic metformin. But the PBM only pays the pharmacy $4.25. The $4.25 difference? That’s pocketed by the PBM. No rebate. No disclosure. Just profit hidden in plain sight.

This isn’t a glitch - it’s the business model. A 2022 U.S. Department of Health and Human Services report found the average spread on generic prescriptions was $4.73 per fill. Multiply that by millions of prescriptions, and you’re talking about billions in hidden fees every year.

Why Don’t Generics Get Rebates?

It’s simple economics. When only one company makes a brand-name drug, they can charge high prices and then offer big rebates to get on insurance lists. But with generics, there are 10, 20, even 50 manufacturers making the same pill. Competition drives the price down - often to pennies per dose. There’s no room for rebate negotiations because there’s no monopoly to negotiate with.

According to the U.S. Government Accountability Office, when rebates do happen on generics, they’re usually under 5% of list price - compared to 30-70% for brand-name drugs. And even those small rebates rarely make it to your insurer. PBMs often keep them.

Here’s the kicker: PBMs sometimes exclude cheaper generics from formularies just to favor more expensive brand-name drugs that pay bigger rebates. A 2023 report from Rightway Healthcare found that PBMs would block a $0.15 generic version of a drug to push a $5 brand-name version with a 60% rebate. The insurer ends up paying more. The patient pays more. And the PBM still gets paid.

What Does Insurance Actually Pay?

Let’s say your plan covers a generic blood pressure pill. The pharmacy charges $12. You pay your $10 copay. Your insurer is billed $12. At first glance, it looks like they paid $2. But that’s not the full story.

The PBM, acting on behalf of your insurer, has already negotiated a lower price with the pharmacy - say, $5. So the $12 billed amount? That’s inflated. The PBM only pays the pharmacy $5. The $7 difference? That’s spread pricing. Your insurer’s “payment” of $2 is just your copay. The real cost to the insurer? $5 - minus whatever administrative fee the PBM charges.

And here’s where it gets worse: Many employers and insurers don’t even know this is happening. A 2023 survey by the National Business Group on Health found that 68% of large employers couldn’t determine the actual net cost of generic drugs because PBMs refused to disclose their acquisition prices.

The Real Cost Isn’t What You See on the Receipt

Your receipt shows your $10 copay. Your explanation of benefits says the insurer paid $2. But the real cost? The pharmacy was paid $5. The PBM kept $7. And your insurer didn’t pay $2 - they paid a fee to the PBM to manage the whole mess.

This system isn’t just confusing - it’s harmful. It removes any incentive for PBMs to push the cheapest, most effective drugs. Why would they? If a $0.15 generic saves you money but pays no rebate, and a $5 brand-name drug pays a $3 rebate, the PBM will choose the $5 drug. Even if it costs more overall.

That’s why some patients end up paying more out-of-pocket for generics than they should. Or worse - they’re denied coverage for a generic because it’s not on the formulary, even though it’s the exact same drug.

Who’s Making Money - and Who’s Losing

Three companies - CVS Caremark, Express Scripts, and OptumRx - control about 80% of the PBM market. They’re the ones setting the spreads, hiding the prices, and designing formularies to maximize their own profits.

Patients lose because they pay higher copays and face coverage denials. Employers lose because their health plan costs are inflated by hidden fees. Taxpayers lose because Medicare and Medicaid overpay for drugs due to lack of transparency.

And the drug manufacturers? They’re not the villains here. Generic makers are competing on price. They’re the ones offering pills for a few cents. The problem isn’t the drug - it’s the middlemen.

What’s Changing? And What You Can Do

There’s pressure building. The Biden administration’s 2024 Executive Order directed the Department of Health and Human Services to investigate practices that limit generic drug use. The No Surprises Act of 2020 started pushing for more transparency. And in 2025, CMS announced new rules requiring PBMs to disclose their pricing structures to employers.

More employers are switching to pass-through pricing. Instead of letting PBMs keep the spread, the employer pays the pharmacy directly - minus a flat administrative fee. No hidden profits. No spread pricing. Just fair pricing.

According to the National Business Group on Health, 42% of large employers now use pass-through models - up from just 18% in 2020. That’s progress.

If you’re an individual with insurance, you can’t control your PBM. But you can ask questions. When you’re handed a generic prescription, ask your pharmacist: “What’s the actual cost to my plan?” If they don’t know, ask your insurer. Demand transparency.

If you’re an employer or plan sponsor, review your PBM contract. Look for language about spread pricing. Demand full disclosure of acquisition costs. Push for pass-through models. Your employees’ wallets - and your bottom line - will thank you.

The Bigger Picture

Generics make up 90% of all prescriptions in the U.S. But they account for only 23% of total drug spending. That’s because they’re cheap - if the system lets them be.

The rebate system was built for brand-name drugs. It doesn’t work for generics. And forcing it to do so - by hiding fees, manipulating formularies, and profiting from spreads - is driving up costs instead of lowering them.

True savings come from competition, not rebates. And the only way to make sure generics deliver on that promise is to cut out the middlemen who profit from opacity.

The system is rigged - but it’s not broken beyond repair. Transparency is the first step. Accountability is the next. And until we demand both, what insurance “pays” for your generic drugs will remain a mystery - and a money pit.