When you fill a prescription for a generic pill-say, lisinopril for blood pressure or atorvastatin for cholesterol-you expect it to be cheap. And usually, it is. But the price you pay at the pharmacy counter isn’t random. It’s the result of a tangled web of federal rules, rebate systems, and market forces that most people never see. In the U.S., the government doesn’t set generic drug prices directly like it does in Canada or Germany. Instead, it uses indirect tools to push prices down-sometimes successfully, sometimes not.

How Medicaid Keeps Generic Prices Low

The biggest lever the federal government pulls is the Medicaid Drug Rebate Program (MDRP). Since 1990, drug makers have been required to pay rebates to states for every generic drug sold to Medicaid patients. The rebate isn’t fixed. It’s calculated quarterly and based on two numbers: the Average Manufacturer Price (AMP) and the Best Price the company offers to any other buyer. The rule? The rebate is the greater of 23.1% of AMP or the difference between AMP and the Best Price.

This system works because it forces manufacturers to compete. If a company slashes its price for a big commercial buyer, it has to match that price for Medicaid-or pay the difference back. In 2024, these rebates totaled $14.3 billion, with generics making up 78% of that total. Without this program, many generic drugs would cost far more.

Medicare Part D and the Out-of-Pocket Cap

For seniors on Medicare Part D, the story is different. The government doesn’t negotiate prices directly for most generics-until now. Starting in 2026, Medicare will begin negotiating prices for a small number of high-cost generics, like apixaban and rivaroxaban. But even before that, the Inflation Reduction Act (IRA) of 2022 changed everything for beneficiaries.

Before 2025, seniors paid 25% coinsurance for generics during the initial coverage phase, with no cap on what they could spend. Now, thanks to the IRA, out-of-pocket costs for all drugs are capped at $2,000 per year. That means even if you take five or six generic medications, your yearly bill can’t go above that. For many, it’s dropped from over $400 a year to under $300.

Low-Income Subsidy (LIS) beneficiaries pay even less: $0 to $4.90 per prescription for generics in 2025. That’s a huge difference from brand-name drugs, where copays can hit $12.15. But here’s the catch: the actual price the pharmacy pays the manufacturer isn’t always what you see on your bill. Pharmacy benefit managers (PBMs) often keep most of the rebates, and patients rarely see the savings.

The 340B Program: Cheap Drugs for the Poorest Patients

If you’re poor and get care at a community health center or safety-net hospital, you might get your generic drugs at a steep discount. That’s thanks to the 340B Drug Pricing Program. Under this rule, manufacturers must sell outpatient drugs-both brand and generic-at prices 20% to 50% below the average market rate to qualifying clinics.

The result? 87% of these clinics say patient adherence to medications has improved because cost is no longer a barrier. A patient who used to skip their metformin because it cost $40 a month might now get it for $8. But here’s the problem: the program doesn’t apply to most retail pharmacies. So if you’re on Medicare and buy your meds at CVS or Walgreens, you won’t get this discount.

Why Some Generic Drugs Suddenly Cost 300% More

The U.S. system works great when there are 10 or 15 companies making the same generic drug. Think of statins or antibiotics-prices drop fast because competition is fierce. But when only two or three manufacturers are left, things get ugly.

In 2024, pyrimethamine (Daraprim), a 70-year-old drug used to treat parasitic infections, saw its price jump 300% overnight. Why? Because only two companies were making it. No competition. No pressure to lower prices. The government didn’t step in because there’s no law forcing them to.

This happens more often than you think. A 2025 analysis found that 12% of generic drugs on the market have only one or two manufacturers. In those cases, prices can spike 500% or more. And there’s nothing in the current system to stop it.

Why the U.S. Pays More Than Other Countries

The U.S. fills 90% of prescriptions with generics-the highest rate in the world. But we still pay more for them than other wealthy countries. A 2025 KFF study found U.S. generic prices are 1.3 times higher than the average of 32 other OECD nations.

Why? Because countries like the UK and Germany set prices directly. The UK’s NICE agency negotiates prices with manufacturers. Germany uses a reference pricing system, where if a drug costs more than a similar one, the government won’t pay the difference. The U.S. relies on market competition. That’s great when there’s competition. It’s disastrous when there isn’t.

And while brand-name drugs cost 3-5 times more here than abroad, the gap for generics is smaller-but still significant. Experts like Dr. Peter Bach argue that if Medicare negotiated generic prices like the VA does, we could save billions. The VA gets 40-60% discounts because it buys in bulk for millions of veterans. Medicare doesn’t have that power-yet.

Who’s Winning and Who’s Losing

The big winners are the manufacturers who produce high-volume generics with lots of competition. Teva, Mylan, and Sandoz dominate the market, together controlling nearly 40% of it. They make money on volume, not margins. But smaller manufacturers? Many operate on profit margins under 15%. Some can’t survive if prices drop too fast.

Patients on fixed incomes are the biggest losers when prices spike. A 68-year-old in Florida might pay $15 a month for generic lisinopril one year, then $90 the next because her pharmacy switched to a different manufacturer with a higher copay. That’s not a price increase-it’s a formulary shuffle. And most patients don’t know why.

Pharmacists are caught in the middle. Independent pharmacy owners spend nearly 11 hours a week just dealing with Medicaid and Medicare reimbursement claims. That’s time they could spend counseling patients.

What’s Changing in 2026 and Beyond

The biggest shift is coming with Medicare’s second round of price negotiations. In 2027, CMS will negotiate prices for 15 more drugs-including generic versions of blood thinners like Eliquis and Xarelto. These are not new drugs. They’re off-patent. But they’re used by over 5 million Medicare beneficiaries. Analysts predict prices could drop 25-35%.

The Congressional Budget Office estimates these changes will save $12.7 billion over ten years. That sounds small compared to total drug spending, but it’s a start. It’s the first time the government has directly targeted generic drugs with negotiation power.

At the same time, the FDA continues to speed up approvals. In 2024, it approved 1,247 generic drugs-the most in a single year. That should increase competition and keep prices down. But the system still has holes. A brand-name company can delay generics by making tiny changes to its drug and getting a new patent. That’s called “product hopping.” And it’s legal.

What You Can Do

You can’t control drug prices, but you can control how you pay for them.

• Use the Medicare Plan Finder tool every fall to compare your Part D plan’s generic drug costs. Formularies change every year.
• Ask your pharmacist if a different generic manufacturer is available with a lower copay. Sometimes switching brands saves $20 a month.
• If you’re on Medicaid or qualify for LIS, make sure you’re enrolled. You’re paying way more than you need to if you’re not.
• Check if your clinic is a 340B provider. If you’re low-income and get care there, you might get your meds for pennies.

Why This Matters

Generic drugs are the backbone of American healthcare. They’re safe, effective, and cost a fraction of brand-name drugs. But the system that keeps them cheap is fragile. It depends on competition, transparency, and political will. When one fails, patients pay the price.

The government doesn’t need to set prices for every generic drug. But it does need to make sure competition stays alive. And when it doesn’t-when only one company is left making a life-saving pill-it needs a backup plan. Right now, it doesn’t have one.