Why Is My Generic Medication Sometimes MORE Expensive Than the Brand Name?

The Setup: How Insurance Formularies Work

Every insurance plan that covers prescription drugs uses a formulary, a tiered list of covered medications with different cost sharing levels at each tier.

A typical four tier formulary works like this:

• Tier 1, Preferred generics: Lowest copay, usually $0 to $15
• Tier 2, Non preferred generics or preferred brands: Moderate copay, usually $30 to $60
• Tier 3, Non preferred brands: Higher copay, usually $60 to $100
• Tier 4, Specialty medications: Highest copay, often 20 to 33 percent coinsurance

The tier placement of a medication is determined by the PBM that manages your plan’s drug benefit, and that placement is influenced significantly by the rebates that pharmaceutical manufacturers pay for preferred tier status.

The Rebate Mechanism That Causes the Problem

Here is where the generic costs more than brand situation originates.

A brand name pharmaceutical manufacturer pays a rebate to the PBM to have their brand name drug placed on a preferred formulary tier, Tier 1 or Tier 2. The rebate makes it financially worthwhile for the PBM to place the brand on a low cost tier even though the drug’s list price is high. The PBM shares some portion of the rebate with the insurance plan, which reduces the plan’s overall drug cost. The plan then sets the patient’s copay for that tier.

The generic version of the same drug has no rebate relationship. It is placed on whatever tier the formulary assigns it, which may be Tier 2 or Tier 3 depending on the plan design.

The result: a brand name drug with a generous manufacturer rebate is placed on Tier 1 with a $10 copay. Its generic equivalent, which has no rebate relationship and is assigned to Tier 2, has a $45 copay.

The patient pays $35 more for the generic. The insurance plan pays less overall because of the rebate. The PBM keeps a portion of the rebate. The manufacturer maintains market share for their brand product despite generic competition. Everyone in the system benefits except the patient.

The Clawback Problem That Makes It Worse

There is a second mechanism that can make generic medications more expensive than brand names at the pharmacy counter, and it is even more counterintuitive.

It is called a clawback, and it happens in situations where the patient’s copay exceeds the actual price of the medication.

Here is how it works. Suppose a generic medication has a cash price of $8. Your insurance plan has a $15 copay for generic medications. You present your insurance card. The pharmacy charges you $15, your copay. But the actual price of the medication is $8. The pharmacy is required under their PBM contract to collect the full $15 copay from you even though the medication costs less. The extra $7, the clawback, goes back to the PBM, not to you.

Until 2018 pharmacists were contractually prohibited from telling you about this. We will cover that story in full in the next post. But the practical consequence is that you were paying more for your medication than the pharmacist knew it actually cost, and neither you nor the pharmacist could legally say anything about it.

Specific Scenarios Where This Happens

Statins, cholesterol medications. Some brand name statin medications with manufacturer copay assistance programs have offered patient copays of $0 through manufacturer coupons, while the generic equivalent costs $20 or more under the patient’s insurance plan. A patient who fills the brand gets it free. The same patient who fills the generic pays $20. The insurer and PBM benefit from the rebate. The patient benefits from the coupon. Generic manufacturers lose market share despite making a clinically equivalent product.

Proton pump inhibitors, acid reflux medications. Omeprazole, the generic equivalent of Prilosec, is one of the most widely used medications in the world. Under some plan designs, the OTC version costs less at the pharmacy counter without insurance than the prescription generic costs with insurance.

Psychiatric medications. Some plans place older brand name psychiatric medications on preferred tiers through rebate relationships while placing generic alternatives on non preferred tiers, producing situations where patients pay more for the generic and less for the brand.

What You Should Do

Always ask your pharmacist for the cash price. Before running your insurance for any prescription, especially generics, ask what the cash price is. If it is lower than your copay, pay cash. A simple comparison that takes thirty seconds can save you real money.

Use a discount card comparison. GoodRx and similar programs show cash prices at multiple pharmacies. For generic medications specifically, discount card prices are frequently lower than insurance copays.

Ask your prescriber whether the brand name has a manufacturer copay card. For expensive brand medications where the generic is not significantly cheaper under your plan, the brand manufacturer may offer a copay assistance card that makes the brand essentially free for commercially insured patients. Your pharmacist can help you identify whether this option exists.

Understand that this is a system design problem, not a pricing error. If you are charged more for a generic than a brand, the pharmacist has not made a mistake. The system has been designed, deliberately, to produce this outcome in specific circumstances. Being aware of it is the first step to not being harmed by it.

This article is for general information only and is not a substitute for personalized medical advice. Before starting or changing any medication, including over the counter products and supplements, talk with your pharmacist or physician about your specific situation.