How Insurers Save Millions on Generic Drugs Through Bulk Buying and Tendering

Most people think generic drugs are cheap because they’re generic. But the truth? Insurers aren’t saving money just because generics exist-they’re saving because they’re bulk buying and running aggressive tendering processes that force manufacturers to compete on price. It’s not magic. It’s procurement, and it’s happening behind the scenes in every major health plan.

Why generics aren’t automatically cheap

Just because a drug is off-patent doesn’t mean it’s affordable. In 2023, the average price of a generic prescription was still $19. That sounds low-until you realize some generics cost over $1,000 a month. Why? Because when there’s only one or two manufacturers making a drug, there’s no competition. And without competition, prices stay high.

The real savings come when insurers bring together hundreds of thousands of prescriptions and say: “We’ll buy 5 million pills of this generic blood pressure drug. Who can deliver it cheapest?” That’s tendering. It’s like an auction, but for medicine.

How tendering works in practice

Insurers don’t just pick the cheapest bid blindly. They use formularies-lists of approved drugs-to steer patients toward the most cost-effective options. A typical formulary has tiers. Tier 1 is the cheapest. Tier 2 is a little more. Tier 3? That’s where brand names live.

But here’s the twist: even within Tier 1, prices vary wildly. One manufacturer might sell amlodipine (a common blood pressure pill) for $0.15 per tablet. Another might charge $0.45. Same drug. Same FDA approval. Same effect. The insurer picks the $0.15 version and locks in a three-year contract.

This isn’t theoretical. A 2022 study in JAMA Network Open found that some insurers were paying up to 90% more for certain generics simply because they didn’t know which versions were cheaper. Once they started auditing their formularies quarterly, they cut spending by 30% in six months.

The middlemen problem

Most insurers don’t buy drugs directly. They use pharmacy benefit managers (PBMs)-companies like OptumRx, Caremark, and Express Scripts. These PBMs negotiate prices, manage formularies, and handle claims. Sounds helpful, right?

Not always.

PBMs often use a trick called “spread pricing.” They tell the insurer: “We negotiated a $10 price for this generic.” Then they tell the pharmacy: “We’ll pay you $6.” The $4 difference? That’s their profit. And here’s the kicker: they don’t have to tell the insurer. The insurer thinks they’re saving money. But the real savings are being siphoned off.

That’s why some employers and health plans are cutting out the middleman. Costco, for example, sells 90-day supplies of common generics for under $10-no insurance needed. Mark Cuban’s Cost Plus Drug Company charges 15% over wholesale cost, plus a $3 fee. No spreads. No secrets. And customers save an average of 76% compared to retail pharmacies.

When cheap goes too far

There’s a dark side to aggressive tendering. When insurers demand prices so low that manufacturers can’t cover production costs, they quit. And when that happens, shortages follow.

In 2020, albuterol inhalers-the lifesaving asthma medication-vanished from shelves across the U.S. Why? Because the price had been bid down to $10 per inhaler. The cost to make one? $12. So manufacturers stopped making them. Eighty-seven percent of hospitals reported shortages.

It’s a classic case of “too much competition.” The system rewards the lowest bid, but doesn’t account for sustainability. The FDA now tracks this risk more closely, but there’s still no safety net for essential generics.

What’s changing in 2026

The Inflation Reduction Act of 2022 was supposed to fix this. It capped insulin at $35 a month for Medicare patients. But it left PBMs untouched. Their spread pricing? Still legal. Their formulary steering? Still opaque.

That’s why states like California passed laws like SB 17 in 2017, forcing PBMs to disclose any price differences over 5%. Now, insurers can see exactly how much the PBM is pocketing.

Meanwhile, the FDA is speeding up generic approvals. In 2023, they approved over 1,000 new generics. The first generic for a drug usually saves $500 million to $1 billion in its first year. That’s why insurers are pushing for early access to new generics-before prices settle.

What you can do

If you’re on insurance, you might be overpaying for generics without knowing it. Here’s what to check:

• Use GoodRx or SingleCare to compare cash prices vs. your insurance copay. You’ll be surprised how often cash is cheaper-even with insurance.
• Ask your pharmacist: “Is there a lower-cost version of this generic?” Sometimes the same drug is made by three different companies. One might cost $3 instead of $30.
• Check if your employer offers a direct-to-consumer pharmacy benefit. Companies like Blueberry Pharmacy and Cost Plus Drug Company are now partnering with employers to bypass PBMs entirely.

The real savings

In 2023, generic drugs saved the U.S. healthcare system $445 billion. That’s more than the entire annual budget of the Department of Education. And $194 billion of that came from adults aged 40 to 64-people who are paying for their own prescriptions.

The lesson? Generics aren’t cheap because they’re generic. They’re cheap because someone fought for it. Insurers didn’t get these savings by accident. They used data, contracts, and competition. And if you know how to ask for it, you can too.