Bulk Buying and Tendering: How Insurers Save on Generic Medications

When you fill a prescription for a generic drug like metformin or lisinopril, you might assume your insurance is getting you the best deal. But here’s the truth: your insurer is likely paying far more than it needs to - not because of the drug, but because of how it’s bought.

How Insurers Actually Buy Generic Drugs

Most insurers don’t buy drugs directly from manufacturers. Instead, they hire pharmacy benefit managers (PBMs) like OptumRx, Caremark, or Express Scripts to handle it. These middlemen negotiate prices, manage formularies, and set what pharmacies get paid. Sounds efficient? Not always.

PBMs use a system called bulk buying and tendering to save money. That means they gather demand from millions of patients, then ask multiple generic drug makers to bid for the contract. The lowest bidder wins - and gets a guaranteed volume of sales. It’s like Costco buying toilet paper in bulk, but for pills.

The savings can be massive. According to the Association for Accessible Medicines, generics made up 90% of all prescriptions in 2023 but only 17% of total drug spending. That’s because when multiple companies make the same drug, competition drives prices down. One study found that after a new generic hits the market, prices can drop by 80-90% within a year. For example, the first generic version of the heart drug bortezomib saved over $1 billion in its first 12 months.

The Hidden Problem: Spread Pricing and Opaque Lists

Here’s where things get messy. Many PBMs don’t pass those savings on to insurers or patients. Instead, they use a practice called spread pricing.

Let’s say a generic drug costs $2 at the manufacturer. The PBM tells the pharmacy to charge $10. The insurer pays $10, but the PBM only pays the pharmacy $5. The $5 difference? That’s the PBM’s profit. You never see it. You just see your $10 copay.

Even worse, insurers often don’t know what’s really going on. PBMs use Maximum Allowable Cost (MAC) lists to cap how much they’ll pay for a generic. But these lists are secret. Insurers can’t see the real wholesale prices. So they think they’re saving money - when they’re actually subsidizing PBM profits.

A 2022 JAMA Network Open study found that many insurers were paying more for certain generics than they would if they just paid cash at a pharmacy. One patient paid $87 through insurance for a generic blood pressure pill. At Cost Plus Drug Company, the same pill cost $4.99.

Who’s Really Saving? The Patient or the Middleman?

It’s not just about the price. It’s about who benefits.

Traditional PBM models prioritize drugs that give them the biggest rebate - even if those drugs cost more. That’s why some high-cost generics stay on formularies, even when cheaper, equally effective options exist. Insurers end up paying more, and patients pay higher copays.

But a new wave of alternatives is changing the game. Companies like Cost Plus Drug Company and GoodRx cut out the middleman entirely. They buy directly from manufacturers, add a transparent 15% markup, and sell to consumers. No spreads. No secrets. Just prices you can see.

A 2023 NIH study showed these direct-to-consumer models saved patients 76% on expensive generics and 75% on common ones. For many, that’s $200-$300 per prescription saved.

Even Medicare is starting to catch on. In 2024, CMS required Medicare Part D plans to disclose PBM pricing details. And states like California passed laws forcing PBMs to reveal price differences that exceed 5%.

How Insurers Can Fix Their Generic Drug Strategy

If you’re an insurer or employer trying to cut costs, here’s what actually works:

• Review your MAC lists quarterly. High-cost generics often have only one or two manufacturers. If there’s no competition, you’re paying a monopoly price.
• Require PBM transparency. Demand full access to the actual acquisition cost of every generic drug. If your PBM won’t share it, switch.
• Use therapeutic substitution. If two generics treat the same condition, choose the cheaper one - even if it’s from a lesser-known brand. Clinical studies show they’re just as safe.
• Partner with transparent pharmacies. Offer employees access to Cost Plus Drug Company, Navitus, or Blueberry Pharmacy. Many already save 60-90% compared to traditional pharmacies.
• Track which generics are costing the most. The JAMA study found that 10% of generic drugs accounted for 70% of spending. Find those outliers and replace them.

Why Some Generic Drugs Are Still Too Expensive

Not all generics are created equal. Some drugs have so few manufacturers that competition doesn’t exist. The FDA found that 80% of certain generic drugs are made by just three companies. When one shuts down - due to low prices, quality issues, or supply chain problems - the others raise prices.

That’s what happened with albuterol inhalers in 2020. After prices dropped below production costs, manufacturers stopped making them. Hospitals reported shortages at 87% of facilities. The fix? Government intervention. The VA negotiates prices directly with makers and pays 24% less than Medicare Part D.

The lesson? Bulk buying only works if there’s real competition. When there isn’t, you need to step in - or pay the price.

What Patients Can Do Right Now

You don’t have to wait for your insurer to fix things. Here’s what you can do today:

• Always ask: "Can I pay cash?" For generics, cash is often cheaper than insurance.
• Use GoodRx or SingleCare. These apps show you the lowest price in your area - sometimes under $5.
• Check if your pharmacy offers a $4 list. Walmart, Kroger, and Target sell dozens of generics for $4-$10.
• Switch to a direct-to-consumer pharmacy like Cost Plus Drug Company if you take multiple generics.

One GoodRx user saved $32 a month on three generic prescriptions - that’s $384 a year. Another paid $15/month for blood pressure meds with no surprises. No insurance needed.

The Bigger Picture: $445 Billion in Savings - But Who Gets It?

In 2023, generics saved the U.S. healthcare system $445 billion. That’s more than the GDP of most countries. Yet most of those savings never reached patients or employers. They stayed with PBMs, pharmacy chains, and insurers who didn’t demand transparency.

The future of generic drug pricing is simple: either we fix the system - or we bypass it.

Insurers that embrace transparent bulk buying, ditch spread pricing, and empower patients with cash-price options will save millions. And patients? They’ll finally get the savings they were promised all along.