Insurance Benefit Design: How Health Plans Use Generics to Cut Costs

When you fill a prescription for high blood pressure or cholesterol, you might not think about why your copay is $5 instead of $50. But behind that simple number is a complex system designed to save billions-generic drugs are the quiet engine of cost control in U.S. health insurance. Health plans don’t just allow generics; they actively push them. And the numbers don’t lie: in 2022, 91.5% of all prescriptions filled in the U.S. were generics, yet they made up only 22% of total drug spending. That’s the power of smart benefit design.

How Generics Became the Default Choice

The modern system started in 1984 with the Hatch-Waxman Act. Before then, generic drugs faced legal and financial barriers that made them rare. The law changed that by creating a clear path for companies to prove their versions of brand-name drugs were just as safe and effective-without repeating expensive clinical trials. The result? Generics flooded the market. Today, they’re typically 80-85% cheaper than their brand-name equivalents. For a drug like lisinopril, a generic blood pressure pill, you might pay $4 for a 30-day supply, while the brand version could cost $120. That’s not a small difference-it’s life-changing for people on fixed incomes.

Insurance plans didn’t just wait for generics to appear. They built systems to make them the easiest, cheapest option. The most common tool? Tiered formularies. These are drug lists divided into cost levels. Tier 1 is almost always generics. Tier 2 is preferred brand-name drugs. Tier 3 and above are non-preferred brands, often with much higher copays. In 2024, commercial plans had generic copays as low as $0-$10 for a 30-day supply. Brand-name drugs? $25-$100. The math is clear: choose the generic, save money.

The Tools Plans Use to Push Generics

It’s not enough to just list generics as cheap. Plans need to make them the default. That’s where five key tools come in:

1. Mandatory substitution: In 49 states, pharmacists can swap a brand-name drug for a generic without asking the doctor-unless the doctor specifically says ‘do not substitute.’
2. Step therapy: You can’t get the expensive brand drug until you’ve tried the generic first. As of 2023, 92% of Medicare Part D plans require this.
3. Closed formularies: Some plans won’t cover the brand drug at all if a generic exists. One Medicare HMO saw brand-name use drop 28.7% after switching to this model.
4. Copay differentials: The gap between generic and brand copays has widened. Between 2010 and 2020, generic copays rose just 12%, but brand copays jumped 47%. That’s not an accident-it’s intentional design.
5. Prior authorization: If your doctor wants to prescribe a brand drug when a generic is available, they have to jump through hoops. Many patients report multiple appeals just to get the drug their doctor recommended.

These aren’t theoretical policies. They’re standard practice. Nearly every major insurer-Medicare Part D, Medicaid, and commercial plans-uses them. In fact, 98.7% of commercial health plans and 100% of Medicare Part D plans have tiered formularies that favor generics as of 2024.

Who Saves? And Who Gets Left Behind?

On paper, everyone wins. Patients pay less. Insurers save money. The system saves billions. The IQVIA Institute estimates generics saved the U.S. healthcare system $3.7 trillion between 2013 and 2022. That’s more than the entire GDP of Australia.

But the story gets messy when you look at who actually pockets the savings. Pharmacy Benefit Managers (PBMs)-companies like CVS Caremark, OptumRx, and Express Scripts-act as middlemen between insurers, pharmacies, and drug makers. They negotiate discounts and rebates. In 2022, they secured $195 billion in savings for health plans. Sounds great, right?

Not so fast. A 2022 study from the USC Schaeffer Center found that patients often pay more than they should. Why? Spread pricing. PBMs charge the insurer one price for a generic drug, pay the pharmacy another, and keep the difference. That gap can be $10-$15 per prescription. If your copay is $5, but the PBM paid the pharmacy $2 and kept $3, you’re not saving as much as you think. And if your plan uses a coinsurance model (you pay a percentage of the drug’s cost), you might end up paying more because the inflated price is the basis for your calculation.

Medicaid programs, which cover low-income patients, had a 89.3% generic dispensing rate in 2022-slightly higher than commercial plans. But even there, reimbursement rules vary by state. Some cap payments at 250% of the average manufacturer price. Others use reference pricing, which sets a fixed payment amount. The result? Patients in some states get true savings. In others, the savings disappear into administrative layers.

Real People, Real Confusion

Patients aren’t stupid. They notice when their $5 copay suddenly becomes $15. Or when their doctor says, ‘I prescribed this brand, but your plan won’t cover it unless you try the generic first.’

On Reddit’s r/healthinsurance, a post asking if anyone else’s generic copay dropped to $0 got 142 comments. Most were happy. But 13% said they couldn’t get the generic they needed because it wasn’t on the formulary. Others reported being switched to a generic that caused side effects-something 31% of physicians told Medscape they’d seen in patients.

A Kaiser Family Foundation survey in early 2024 found 68% of Medicare Part D beneficiaries were satisfied with their generic coverage. But 22% had trouble getting prior authorization for brand drugs, and 14% said their doctors had to appeal multiple times. That’s not just bureaucracy-it’s stress, delays, and sometimes worse health outcomes.

And then there’s the hidden cost: the time it takes to understand your plan. A Commonwealth Fund study found only 38% of Medicare beneficiaries could correctly explain how their generic drug coverage worked. That’s not your fault. It’s the system’s failure. Insurance documents are long, legalistic, and full of jargon. If you don’t know how your copay is calculated, you can’t make smart choices.

The New Players Changing the Game

Not everyone’s happy with how PBMs control pricing. Enter Mark Cuban Cost Plus Drug Company (MCCPDC). Launched in 2022, it sells generics directly to consumers at transparent prices: cost of the drug + 15% + $3 pharmacy fee. No rebates. No spreads. No middlemen. In 2023, a study found patients saved $4.96 per prescription on average-especially those without insurance. Medicaid patients saw no savings, because the program already pays a fixed rate. But for the uninsured, it’s a game-changer.

Other innovations are coming. The Inflation Reduction Act, which took full effect in 2025, caps out-of-pocket drug costs for Medicare Part D beneficiaries at $2,000 per year. That’s huge. It means seniors can’t be priced out of their meds-even if they’re on expensive brand drugs. But it also changes the incentive for plans to push generics. If the cap is $2,000, does it matter if a drug costs $100 or $1,000? Maybe not. That’s forcing insurers to rethink their strategies.

And then there’s the GENEROUS Model, set to launch in 2026. This CMS initiative will let Medicaid programs negotiate directly with drugmakers for lower generic prices. If successful, it could cut Medicaid drug spending by $40 billion over ten years. It’s the first time the government has taken direct control over generic pricing at this scale.

What’s Next?

The future of generic-driven benefit design is clear: more transparency, more competition, and more pressure on intermediaries. Starting January 1, 2025, all insurance plans must show detailed breakdowns of drug costs on Explanation of Benefits (EOB) statements. No more hidden spreads. No more mystery pricing.

But the biggest question remains: will patients actually benefit? Or will savings continue to flow to PBMs, manufacturers, and insurers while patients are left guessing?

One thing’s certain: generics aren’t going away. They’re the most powerful cost-control tool we have. But if we want them to work for patients-not just for balance sheets-we need to fix the system that’s been hiding the real savings for too long.