Pharmacy Reimbursement Models: How Laws Control Generic Drug Payments

When you pick up a generic prescription at the pharmacy, you might think the price is simple: lower cost, same medicine. But behind that $4.50 copay lies a tangled web of federal laws, state regulations, and corporate contracts that decide exactly how much the pharmacy gets paid-and whether they can even afford to fill your script. The system isn’t broken by accident. It’s built that way.

How Generic Drugs Got Their Price Tag

The foundation of today’s generic drug system comes from the 1984 Hatch-Waxman Act. This law let drugmakers copy brand-name medications without repeating expensive clinical trials, as long as they proved bioequivalence. In return, brand-name companies got extended patent protection. The goal? Lower prices through competition. And it worked. Today, generics make up 90% of all prescriptions filled in the U.S., but only 23% of total drug spending.

But here’s the catch: just because a generic drug is cheaper doesn’t mean the pharmacy gets paid more. In fact, the opposite is often true. Reimbursement models are designed to push pharmacists toward generics-but the money they receive doesn’t always reflect the real cost of buying the pills.

Two Ways Pharmacies Get Paid for Generics

There are two main reimbursement models for generic drugs: Average Wholesale Price (AWP) and Maximum Allowable Cost (MAC).

AWP used to be the standard. It’s a list price set by manufacturers, often inflated, and pharmacies were paid a percentage below it. But since AWP didn’t match what pharmacies actually paid, it became unreliable. Most plans switched to MAC.

MAC is simpler: the payer sets a fixed maximum amount they’ll pay for each generic drug per unit-say, $0.50 for a 30-day supply of lisinopril. If the pharmacy buys it for $0.40, they pocket $0.10. If they pay $0.60? They eat the loss. No exceptions.

This system sounds fair, but it’s brutal for small pharmacies. In 2023, the average profit margin on generic drugs was just 1.4%, down from 3.2% in 2018. Many independent pharmacies operate on razor-thin margins. A single MAC rate change can turn a profitable month into a loss.

Medicare Part D and the Hidden Rules

Medicare Part D covers 50.5 million seniors and people with disabilities. It’s the biggest player in generic reimbursement. But its rules are complex.

Part D plans use formularies-lists of covered drugs-with tiers. Generics are usually in Tier 1, with the lowest copay. But not all generics are treated equally. Some plans put certain generics on higher tiers if they’re “non-preferred,” even if they’re chemically identical. Patients pay more. Pharmacists get paid less.

And then there’s prior authorization. In 2022, 28% of Part D plans required prior authorization for at least one generic drug. That means the pharmacist has to call the doctor, fill out forms, wait for approval-and sometimes the patient walks away because it’s too much hassle.

The new Medicare $2 Drug List Model, rolling out in 2025, could change this. It targets about 100-150 low-cost, high-use generics like metformin, atorvastatin, and levothyroxine. If a plan joins, it must charge no more than $2 for these drugs, no matter the patient’s deductible. The idea? Make adherence easier and cut confusion.

Who Really Controls the Prices? PBMs

Behind the scenes, Pharmacy Benefit Managers (PBMs) are the hidden power brokers. CVS Caremark, Express Scripts, and OptumRX handle over 80% of all prescription claims in the U.S.

PBMs don’t just negotiate prices. They also collect rebates from drugmakers-and keep a slice of the difference between what insurers pay and what pharmacies get paid. This is called “spread pricing.”

For example: the insurer agrees to pay $10 for a generic drug. The PBM tells the pharmacy they’ll be paid $7. The PBM pockets $3. The pharmacy doesn’t know the insurer paid $10. The patient pays their $5 copay. The PBM gets paid twice: from the insurer and from the spread.

This lack of transparency hurts pharmacies and patients alike. Before 2018, PBMs used “gag clauses” to stop pharmacists from telling customers they could buy the same drug cheaper without insurance. Now banned, but the damage lingers.

State Laws Are Trying to Fix the Gaps

Federal rules leave big holes. So states stepped in. As of 2023, 44 states passed laws regulating how PBMs reimburse pharmacies for generics.

Some states now require PBMs to pay pharmacies at least the actual acquisition cost of the drug. Others ban spread pricing entirely. A few mandate that pharmacies be notified of MAC changes at least 30 days in advance.

But it’s a patchwork. A pharmacy in California might be protected. One in Texas might not be. And PBMs often refuse to contract with pharmacies that don’t accept their terms-leaving patients with fewer choices.

What’s Next? The Model and Beyond

The Medicare $2 Drug List Model is the most significant shift in years. It’s not mandatory, but if enough Part D plans join, it could force the whole system to adapt.

It’s also a signal: policymakers are tired of the current mess. The Inflation Reduction Act’s $2,000 out-of-pocket cap on Part D drugs (starting in 2025) will push more people toward generics. If those generics are still priced at $5 or $10, the savings won’t matter.

Long-term, experts predict a move toward value-based payments. Instead of paying per pill, plans might pay for outcomes: Did the patient’s blood pressure drop? Did they avoid hospitalization? That could make generics even more valuable-but only if reimbursement keeps up.

Real Impact: A Pharmacist’s Day

Imagine you’re a pharmacist in Ohio. A patient comes in with a script for generic metformin. The MAC rate is $0.60. You bought the batch for $0.65. You lose $0.05 per pill.

You call the patient’s PBM. They say the rate hasn’t changed. You check your contract. It says you agreed to MAC pricing. You can’t dispute it.

The patient asks why it’s $5 today when it was $4 last month. You can’t explain the MAC rate change. You can’t say the PBM made $3 off the insurer. You can’t tell them they could buy it for $2 at Walmart.

That’s the reality. Laws and reimbursement models don’t just affect numbers on a ledger. They affect whether a pharmacy stays open. Whether a patient gets their medicine. Whether trust in the system survives.

What You Can Do

If you’re on Medicare or have private insurance, here’s how to protect yourself:

• Always ask your pharmacist: "Can I pay cash for this?"
• Compare your plan’s formulary each year during open enrollment.
• Use tools like GoodRx or SingleCare to check cash prices before filling.
• If your generic is suddenly more expensive, ask why-there’s usually a MAC change or formulary shift.
• For high-volume generics, consider mail-order or retail discount programs.

The system is complex, but you’re not powerless. Understanding how reimbursement works lets you make smarter choices-and maybe save hundreds a year.