Bulk Buying and Tendering: How Insurers Save on Generic Medications

Most people assume their insurance covers generic drugs cheaply. But the truth? Many are still paying way too much - not because the drugs are expensive, but because the system is broken. Insurers aren’t just buying generics at wholesale. They’re running complex bidding wars, locking in volume deals, and cutting out middlemen to save millions. And those savings? They’re real. And they’re happening right now.

How generics became the backbone of prescription savings

In 2023, generics made up over 90% of all prescriptions filled in the U.S. But they accounted for just 17% of total drug spending. That’s not a typo. A bottle of generic lisinopril costs $4 at Costco. Your insurance might charge you $35 for the same thing. Why? Because the system was built to hide the real price.

The Hatch-Waxman Act of 1984 opened the door for generic drug approvals. It wasn’t just about competition - it was about forcing prices down. Fast-forward to today, and the first generic version of a brand-name drug can save patients and insurers over $1 billion in the first year. The FDA confirmed that in 2022. One drug, albuterol inhalers, saw prices drop 80% after generics hit the market - until manufacturers couldn’t make money at those prices and stopped producing them. That’s the double-edged sword.

How insurers actually save money: tendering explained

Insurers don’t just pick a generic and call it a day. They run tendering processes - basically, a public auction for drug supply. They’ll say: “We need 1 million tablets of metformin. Who can deliver it cheapest?”

Multiple manufacturers bid. The insurer picks the lowest. They sign a 1- to 3-year contract. In return, the manufacturer gets guaranteed volume. It’s win-win - unless there’s only one manufacturer left. That’s when things go wrong.

This isn’t guesswork. It’s data-driven. Insurers track every generic drug on their formulary. They flag ones with high costs but low competition. If a drug has only two makers and costs $12 a month, they’ll look for a similar one with five makers selling for $3. They swap it. Simple. And they do it quarterly.

The hidden problem: spread pricing and opaque deals

Here’s where it gets shady. Many insurers don’t buy directly from manufacturers. They use Pharmacy Benefit Managers (PBMs) - companies like OptumRx, CVS Caremark, and Express Scripts. These PBMs act as middlemen. And they make money on the spread.

Let’s say a generic drug costs $2 wholesale. The PBM tells the insurer it costs $25. The insurer pays $25. The PBM pays the pharmacy $10. The PBM pockets $15. That’s spread pricing. And it’s legal. But it’s not transparent. The insurer doesn’t know the real cost. The patient doesn’t know either.

A 2022 JAMA Network Open study found that plan sponsors - meaning insurers and employers - often don’t even know which generics are driving up their costs. Some high-cost generics have no real reason to be expensive. They’re just sitting on a formulary because the PBM makes more off them.

What works better: cash pay and direct-to-consumer pharmacies

A growing number of people are skipping insurance entirely. Why? Because cash is cheaper.

Mark Cuban’s Cost Plus Drug Company sells generics at cost plus 15%. No middlemen. No hidden fees. A 30-day supply of atorvastatin? $4.33. Same drug through insurance? $47. That’s a 91% savings.

GoodRx coupons, Costco, and Wal-Mart’s $4 list show the same pattern. In 2020, 97% of cash payments for prescriptions were for generics. That’s not because people are trying to be rebels. It’s because insurance often doesn’t save them money.

Blueberry Pharmacy, a newer direct-to-consumer model, reports average ratings of 4.7 out of 5. Customers love one thing: predictability. “My blood pressure med costs $15 a month. No surprises,” one review says. That’s what insurers should be offering.

Why some generics disappear: the shortage trap

There’s a dark side to extreme price pressure. When insurers push for the lowest possible price, manufacturers sometimes can’t cover production costs. They shut down. And then - boom - shortages.

In 2020, albuterol inhalers vanished from 87% of U.S. hospitals. Why? Because the price dropped below what it cost to make them. The FDA warned: if you squeeze too hard, you break the system.

This isn’t just about one drug. Eighty percent of certain generic drugs are made by just three manufacturers. If one quits, prices spike. Or worse - the drug disappears.

What insurers are doing differently now

Forward-thinking insurers are changing their approach. They’re ditching the old PBM contracts. They’re demanding transparency. California passed SB 17 in 2017, forcing PBMs to disclose any spread over 5%. Other states are following.

Some employers are going direct. They’re cutting out PBMs entirely and buying generics in bulk from manufacturers. One company, Navitus Health Solutions, cut generic drug costs by 22% for its clients in 2023 just by switching to a transparent model.

The Inflation Reduction Act of 2022 tried to fix Medicare Part D. But it didn’t touch PBM spread pricing. That’s still wide open. So while seniors get capped insulin costs, their other generics? Still overpriced.

What you can do - even if you’re not an insurer

You don’t need to be a big company to save. Here’s what works:

• Always check GoodRx or SingleCare before using insurance
• Ask your pharmacist: “What’s the cash price?”
• If your insurance won’t cover a generic, ask for a therapeutic substitution - a cheaper, clinically equivalent drug
• For chronic meds, consider mail-order or direct-to-consumer pharmacies like Cost Plus Drug Company

A 2023 Reddit user paid $87 for a generic through insurance. Paid $4.99 cash at Cost Plus. Same pill. Same dose. One saved him $82.

The future: more transparency, more savings

The FDA’s GDUFA III rules, launched in 2023, are speeding up generic approvals. More generics = more competition = lower prices.

CMS now requires Medicare Part D plans to show real drug prices - not inflated list prices. That’s a big step.

By 2035, experts estimate the U.S. could save an extra $127 billion just by improving how generics are bought and priced. That’s money back in patients’ pockets. And in employers’ budgets.

The system isn’t perfect. But it’s fixable. And it’s being fixed - slowly, one transparent contract at a time.