The generic drug pricing game: What employers need to know.

Generic medications are intended to be cost-effective alternatives to brand-name drugs. They play a vital role in making medications more affordable and accessible, typically costing 80-85% less. However, patients and plan sponsors may not always reap the full benefits depending on their PBM structure.

What are generic medications?

Generic medications are drugs that are identical to brand-name versions in dosage, strength, safety, effectiveness, and quality—but sold at a lower cost. They become available once the patent for a brand-name drug expires, allowing other manufacturers to produce and market the same medication.

For example, Motrin is the brand name for ibuprofen, Claritin for loratadine, and Lipitor for atorvastatin. Generics also go through rigorous approval processes to ensure they meet the same standards as brand-name drugs for safety, efficacy, and quality. Despite their identical therapeutic benefits, generic drugs are priced significantly lower due to reduced development costs and market competition.

How traditional PBMs distort generic drug pricing.

Behind the scenes, traditional pharmacy benefit managers (PBMs) are exploiting the system to inflate the prices of generic medications, sometimes marking them up by as much as 20%. These self-serving pharma pricing models drive up costs, restricting access to necessary medications for both employers and their teams.

Traditional PBMs use pricing models and rebate schemes along with deceptive formulary designs to prevent consumers from benefitting from the savings that generic drugs offer.

Spread pricing and hidden markups.

PBMs can artificially inflate the prices of generic drugs and pocket the excess profits, leaving patients and plan sponsors to cover the inflated costs. They use drug pricing tactics, such as:

Copay clawbacks.

When members use their prescription benefits to pay for generic medications, the copay can sometimes exceed the actual cost of the drug.

PBM spread pricing.

PBMs charge plan sponsors a higher price for a generic drug than they reimburse to pharmacies. Spread pricing is especially common with generics due to their lower base costs and allows PBMs to pocket the difference, reducing the savings that should be passed on.

Opaque formularies that disfavor generics.

The position of a drug on a formulary affects its insurance coverage and cost. Traditional PBMs' formulary designs often disadvantage generics through:

Deprioritizing generics.

PBMs negotiate rebates from drug manufacturers to prioritize the manufacturer's drugs on their formularies. Because generic manufacturers typically offer smaller rebates than brand-name manufacturers, PBMs may favor brand-name drugs to maximize rebate income.

Excluding generics.

PBMs might exclude generic drugs from their formularies in favor of higher-rebate brand-name drugs. This forces patients to either pay out-of-pocket or navigate a complex appeals process for coverage.

The impact of inflated generic drug prices on employers.

The lack of PBM transparency increases pharmacy costs and limits employees' medication options. Tactics like copay clawbacks, spread pricing, and rebate games inflate drug costs, leading to higher premiums, copays, and out-of-pocket expenses for employees.

Employers often struggle to understand the profit mechanisms of PBMs and how much of the savings from generics are actually passed on to them. This lack of drug price transparency puts benefit administrators at a significant disadvantage during negotiations. Without a clear understanding of the true cost of medications, they cannot secure favorable terms with their PBM or make informed decisions for their teams.

How employers can maximize the benefits of generics.

Despite these challenges, there are strategies plan sponsors can use to ensure they get the most out of generics:

Review PBM contracts for generic pass-through.

Ensure your PBM contract includes clear terms on how generic savings are passed back to you. Regular audits or detailed reports from your PBM can verify that the agreed-upon savings are realized.

Analyze generic utilization.

Assess the use of generics in your plan to identify improvement opportunities. Work with your PBM to implement formulary designs that prioritize generics and encourage their use over brand-name drugs.

Educate employees on generic medication options.

Communicate the benefits of choosing generics over brand-name drugs to your employees. Inform them about cash-pay options for generics, like Mark Cuban Cost Plus Drugs, which can be significantly cheaper than using insurance coverage.

Why Rightway’s transparent PBM model works.

Avoid the deceptive practices surrounding generics by partnering with a transparent PBM. Unlike traditional PBMs, Rightway offers a pricing model that prioritizes generic drug pricing transparency and optimizes cost savings.

Discover how Rightway’s effective, pass-through PBM can unlock the full value of generics and transform pharmacy benefits for your organization. Learn more here.