Pharmacy Reimbursement: How Generic Substitution Impacts Pharmacies and Patients Financially

When a pharmacist hands you a prescription for a generic drug instead of the brand-name version, it’s not just a simple swap. Behind that decision lies a complex financial system that determines how much the pharmacy gets paid, how much you pay at the counter, and who makes the real profit. In 2025, over 90% of prescriptions filled in the U.S. are for generic drugs. That’s up from just 33% in 1993. But the financial incentives driving this shift aren’t always aligned with what’s best for patients or pharmacies.

How Pharmacies Get Paid for Generic Drugs

Pharmacies don’t get paid the same way for every drug. For brand-name medications, reimbursement is often based on the Average Wholesale Price (AWP), minus a set percentage. But for generics, it’s a different story. Most payers - including Medicare, Medicaid, and private insurers - use something called a Maximum Allowable Cost (MAC) list. This is a list of the highest price a pharmacy will be reimbursed for each generic drug, regardless of what the pharmacy actually paid for it.

Here’s the catch: MAC lists aren’t standardized. One PBM might set the MAC for a 30-day supply of lisinopril at $4.50, while another sets it at $8.20. The pharmacy might have bought it for $2.10. If the MAC is $8.20, the pharmacy pockets $6.10 - minus the dispensing fee. But if the MAC drops to $4.50, the pharmacy only makes $2.40. That’s a huge swing in profit on a single prescription.

Some pharmacies operate on a cost-plus model, where they’re paid a fixed percentage above what they paid for the drug. That sounds fair, right? But many PBMs have moved away from it because it doesn’t let them control costs as tightly. Cost-plus gives pharmacies more predictable margins, but it also limits the ability of PBMs to profit from price differences.

The Hidden Profit in Generic Substitution

Generic drugs have a gross margin of about 42.7%, compared to just 3.5% for brand-name drugs. That’s why pharmacies are eager to dispense them. But here’s where things get twisted: PBMs don’t always want the cheapest generic. They want the one that gives them the biggest spread.

Spread pricing is when a PBM negotiates a low acquisition cost with the pharmacy - say $1.50 for a generic - but charges the insurer $7.00. The $5.50 difference is the spread. And PBMs make more profit when the MAC list includes higher-priced generics, even if cheaper, equally effective alternatives exist. Studies show that some generics substituted for the same drug class had prices 20 times higher than their therapeutic alternatives. And the pharmacy? They get paid the MAC amount, so they don’t care which one it is - as long as they get reimbursed.

Patients don’t see this. They pay their copay - often a flat $10 or $15 - no matter how much the drug actually costs. So if the PBM sets a high MAC, the patient pays the same, but the system wastes money. That money doesn’t go to the pharmacy. It goes to the PBM.

Therapeutic Substitution: The Bigger Savings Opportunity

Most people think generic substitution means swapping one brand for its generic version. But there’s a bigger opportunity: therapeutic substitution. That’s when a pharmacist or PBM switches a patient from a brand-name drug to a different generic drug in the same class - say, switching from a brand-name statin to a different generic statin that’s cheaper.

The Congressional Budget Office found that in 2007, switching single-source brand-name drugs to generic alternatives saved $4 billion. But swapping one generic for another generic? Only $900 million. Why? Because the biggest savings come from replacing expensive branded drugs - not from swapping between generics.

Yet most reimbursement systems still focus on generic substitution, not therapeutic substitution. PBMs don’t incentivize pharmacists to suggest cheaper alternatives in the same class. Why? Because those alternatives aren’t always on the formulary. And if they’re not on the formulary, they don’t get reimbursed.

Why Independent Pharmacies Are Struggling

Over 3,000 independent pharmacies closed between 2018 and 2022. Why? Because reimbursement rates have been squeezed. The average dispensing fee - the flat fee pharmacies get for filling a prescription - has barely budged in 15 years, hovering around $4 to $6. Meanwhile, the cost of running a pharmacy - rent, staff, compliance, technology - has gone up.

For a small pharmacy, a single generic prescription might only net $1.50 after paying for the drug and labor. That’s not sustainable. Many now rely on high-volume, low-margin sales to stay open. But when PBMs change MAC lists or reduce dispensing fees, those margins vanish overnight.

At the same time, three PBMs - CVS Caremark, Express Scripts, and OptumRx - control 80% of the market. They set the rules. Independent pharmacies have little power to negotiate. Chain pharmacies have some leverage because they fill so many prescriptions. But independents? They’re at the mercy of MAC lists and contract terms they didn’t write.

What’s Changing in 2025?

The Federal Trade Commission is cracking down on spread pricing. In 2023, they launched investigations into how PBMs use opaque MAC lists to inflate reimbursement without transparency. The Inflation Reduction Act of 2022 forced Medicare Part D to disclose drug pricing, and that pressure is starting to spill into commercial insurance.

Now, 15 states have created Prescription Drug Affordability Boards (PDABs). These boards can set Upper Payment Limits (UPLs) - the maximum amount payers can be charged for a drug. Some UPLs are set below current MAC rates, which forces PBMs to lower prices or lose reimbursement. That’s good for patients and payers. But it’s risky for pharmacies: if the UPL drops below what the pharmacy paid for the drug, they lose money on every fill.

Meanwhile, PBMs are pushing Generic Effectiveness Rates (GERs). These are contractual limits that cap how much a PBM will pay for generics over a year. If a pharmacy exceeds the GER, they get paid less. It’s a way for PBMs to control spending - but it also discourages pharmacies from dispensing even low-cost generics if they’ve already hit their limit.

Who Really Wins and Loses?

Let’s break it down:

• PBMs win - they profit from spread pricing and control the reimbursement rules.
• Insurers and Medicare win - they pay less overall, even if the system is opaque.
• Patients win on price - they pay low copays - but lose on transparency and sometimes on access if cheaper drugs aren’t available.
• Pharmacies lose - squeezed margins, unpredictable reimbursements, and no voice in the system.
• Manufacturers lose - generic drug makers face price pressure, but branded drug makers are losing market share fast.

The system was designed to save money. And it has - billions of dollars saved since the 1990s. But the savings aren’t going where they should. They’re going to corporate middlemen, not to patients or pharmacies. And the people who actually hand the medication to you - the pharmacist - are being pushed to the edge.

What Can Be Done?

Transparency is the first step. If MAC lists were published and standardized, pharmacies could plan better. If patients knew what drugs cost - not just their copay - they could ask for cheaper alternatives.

Some pharmacies are switching to direct primary care models or cash-based pricing for generics, bypassing PBMs entirely. A few states are experimenting with pharmacy reimbursement based on clinical outcomes, not just volume. That’s promising.

But until reimbursement models reward value - not volume - and until pharmacies have a seat at the table, the financial imbalance will keep growing. The goal should be simple: get patients the right drug, at the lowest cost, and make sure the pharmacy can stay open to deliver it.