Generic vs. Brand Pricing

Drug Pricing · 6 min read

Generic drugs account for roughly 90% of prescriptions dispensed in the United States but only about 18% of total drug spending. This imbalance reflects the enormous price difference between generic and brand medications, and it creates distinct economic dynamics for PBMs, pharmacies, and plan sponsors.

Generic Drug Economics

When a brand drug loses patent protection, generic manufacturers can produce bioequivalent versions at a fraction of the original cost. Generic prices tend to drop dramatically as more manufacturers enter the market. A brand drug priced at $500 per month might have generic equivalents available for $10-$30. For plan sponsors, generic utilization is the single most impactful cost-saving lever in pharmacy benefits.

However, generic pricing creates significant margin opportunity for PBMs. Because pharmacies acquire generics at very low costs and contract reimbursement is typically set at a discount off AWP (which remains inflated even for generics), the spread between what PBMs charge plan sponsors and what they reimburse pharmacies can be proportionally large.

Brand Drug Economics

Brand drugs carry higher per-unit costs but also generate manufacturer rebates that offset a portion of the expense. The net cost of a brand drug after rebates can sometimes be competitive with or even lower than the gross cost of a therapeutic alternative, though this comparison requires careful analysis of actual contract terms and rebate flow.

The Generic Effective Rate

Employers evaluating PBM performance should track the generic effective rate (GER), which measures the average discount achieved on generic drugs relative to their AWP. GERs of AWP minus 85% or better are common in competitive markets. Comparing your plan's GER to industry benchmarks reveals whether your PBM contract delivers competitive generic pricing.

Optimization OpportunityGeneric utilization rate and generic effective rate are the two most impactful metrics for pharmacy cost management. A 1% improvement in generic utilization can save a mid-size employer hundreds of thousands of dollars annually.