Pharmacy Reimbursement: How Generic Substitution Affects Pharmacies and Patients Financially

When you pick up a prescription at the pharmacy, you probably don’t think about how much the pharmacy actually gets paid for it. But that payment - the pharmacy reimbursement - is what keeps the doors open. And when a brand-name drug is swapped out for a generic, the money changes hands in ways that don’t always benefit the patient or the pharmacist. In fact, the system is designed to save money for insurers and PBMs, but often at the cost of pharmacy profitability, patient access, and true cost savings.

How Generic Substitution Works (And Why It’s Supposed to Save Money)

Generic drugs are chemically identical to their brand-name counterparts but cost far less. In 1993, only about one-third of prescriptions filled in the U.S. were generics. By 2023, that number jumped to over 90%, according to the Association for Accessible Medicines. That’s not just a trend - it’s a financial revolution. The Congressional Budget Office estimated that switching just seven classes of brand-name drugs to generics in Medicare could have saved $4 billion in 2007. Today, those savings are in the tens of billions.

The idea is simple: replace expensive brand-name drugs with cheaper generics. But the way pharmacies get paid for that swap doesn’t always match the goal. The real story isn’t about the drug itself - it’s about the reimbursement model behind it.

The Three Pillars of Pharmacy Reimbursement

Pharmacies don’t get paid a flat rate. Their reimbursement comes from three parts:

• Ingredient cost: What the pharmacy paid for the drug
• Dispensing fee: A fixed amount for filling the prescription
• Reimbursement model: How the payer (insurance, Medicare, Medicaid, or PBM) calculates the total payment

The most common model used to be cost-plus: pay the pharmacy what they paid for the drug, plus a percentage (say, 15%) and a $5 dispensing fee. But that model started to disappear. Why? Because it capped profits on generics. If a generic drug costs $2, and the pharmacy gets 15% over cost plus $5, they make $5.30. If the drug costs $10, they make $6.50. The profit doesn’t grow much - and PBMs didn’t like that.

So they switched to Maximum Allowable Cost (MAC) lists. These are secret price ceilings set by PBMs for each generic drug. The pharmacy gets reimbursed up to the MAC price - even if they bought the drug cheaper. If the MAC is $8 and the pharmacy paid $3, they pocket $5 in profit (plus the dispensing fee). If the MAC is $12 and they paid $3, they make $9. The higher the MAC, the bigger the margin.

Here’s the catch: PBMs control the MAC list. They can put a higher-priced generic on the list - even if a cheaper, clinically identical version exists - and make more money through spread pricing.

Spread Pricing: The Hidden Profit Engine

Spread pricing is the term for when a PBM charges the health plan one price for a drug but pays the pharmacy a lower price. The difference? That’s their profit. And it’s where generic substitution gets twisted.

For example, a PBM might tell the insurance plan, “We’ll cover this generic at $15.” But they only pay the pharmacy $5 for it. The pharmacy gets $5 plus a $5 dispensing fee - so $10 total. The PBM keeps $5. That’s spread pricing. And it’s legal - as long as it’s hidden.

Studies show that in some cases, the same generic drug - same manufacturer, same dose - was priced 20 times higher on MAC lists than its cheaper therapeutic alternative. Why? Because the PBM wanted to maximize spread. The patient didn’t care. The pharmacy didn’t know. The insurer paid more than they needed to.

This isn’t theoretical. A 2022 study in the Journal of the American Pharmacists Association found that when PBMs switched a patient from a $3 generic to a $60 generic - both equally effective - the PBM pocketed an extra $57 per prescription. The patient’s copay stayed the same. The pharmacy didn’t get more money. The only winner was the PBM.

Why Pharmacies Are Losing Money - Even When They Sell More Generics

You’d think more generics = more profit. But it’s not that simple.

Gross margins on generics average 42.7%, compared to just 3.5% for brand-name drugs, according to the Commonwealth Fund. Sounds great, right? But here’s the reality:

• Many pharmacies are paid based on MAC prices that are set below what they actually paid for the drug
• Dispensing fees haven’t kept up with inflation - some are still $4 or $5 after 20 years
• PBMs demand volume discounts, forcing pharmacies to buy in bulk, tying up cash flow
• When a pharmacy’s reimbursement drops below cost, they’re losing money on every generic they fill

Between 2018 and 2022, over 3,000 independent pharmacies closed. Why? They couldn’t survive on reimbursements that didn’t cover their costs. The big chains - CVS, Walgreens, Walmart - have more leverage. They can negotiate better terms. Independent pharmacies? They’re left with the scraps.

Therapeutic Substitution: The Real Savings Opportunity

Most people think “generic substitution” means swapping one brand for its generic version. But the biggest savings come from therapeutic substitution: switching from a brand-name drug to a different generic drug in the same class.

For example, instead of paying $120 for a brand-name statin, a patient could be switched to a generic statin that costs $4. That’s a 97% drop. But PBMs rarely push this. Why? Because therapeutic substitution requires clinical judgment. It’s not automatic. It’s not in the PBM’s algorithm. And it doesn’t create as much spread.

The Congressional Budget Office found that therapeutic substitution saved far more than simple generic substitution. But the reimbursement system doesn’t reward it. It rewards volume - not value.

What’s Changing? New Rules, New Pressure

The tide is turning - slowly.

The Inflation Reduction Act of 2022 forced Medicare Part D to disclose drug pricing. That’s a start. Now, 15 states have created Prescription Drug Affordability Boards (PDABs) that set Upper Payment Limits (UPLs). These caps force PBMs to lower MAC prices - which means pharmacies might finally get paid fairly.

The Federal Trade Commission is also investigating PBM spread pricing. In 2023, they sent subpoenas to the three largest PBMs - CVS Caremark, Express Scripts, and OptumRx - demanding records on how they set MAC lists. If they’re found to be manipulating prices to boost profits, the rules could change.

But here’s the problem: even if MAC lists get transparent, pharmacies still face a broken system. Dispensing fees are too low. Reimbursement delays are common. And PBMs still control the levers.

What This Means for Patients and Pharmacists

For patients: You might think you’re saving money because your copay is $5 for a generic. But if your insurer paid $60 for it and the pharmacy only got $5, you’re not seeing the real savings. Your premiums might still be rising because the system is rigged.

For pharmacists: You’re the ones on the front lines. You’re the ones explaining why a patient got a different pill than expected. You’re the ones caught between a PBM’s secret pricing and a patient’s confusion. And you’re the ones getting squeezed out of business.

The system was built to save money. But it’s saving money for the wrong people.

What Can Be Done?

There are three clear paths forward:

1. Transparent MAC lists: PBMs must disclose how they set prices. No more secret spreads.
2. Higher dispensing fees: Pay pharmacists fairly for their time. $5 in 2026 is not the same as $5 in 2006.
3. Value-based reimbursement: Reward pharmacies for choosing the lowest-cost effective drug - not just any generic.

Some states are already trying. Minnesota and California have passed laws requiring PBMs to pass savings to patients. But without federal action, it’s a patchwork.

The truth? Generic substitution isn’t broken. The reimbursement system is.

What’s Next?

By 2031, experts predict that if current trends continue, average drug prices could drop 5-15%. But that won’t happen unless the system stops rewarding manipulation and starts rewarding honesty.

Pharmacists aren’t just filling prescriptions. They’re the last line of defense against a broken pricing system. And if we don’t fix reimbursement, we won’t fix drug affordability - no matter how many generics we dispense.