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 real story is more complicated. Insurers don’t just accept whatever price a pharmacy charges. They actively fight to lower costs-using bulk buying and tendering strategies that can cut generic drug prices by up to 90%. This isn’t magic. It’s procurement, plain and simple.

How Generic Drugs Became a Bargain-And Why Insurers Care

In 1984, the Hatch-Waxman Act changed everything. It created a fast-track approval process for generic drugs, letting manufacturers copy brand-name medicines without repeating expensive clinical trials. The result? A flood of cheaper alternatives. Today, 90% of all prescriptions in the U.S. are for generics. But here’s the twist: even though generics make up 90% of prescriptions, they only account for 17% of total drug spending. That’s where insurers make their biggest savings.

But not all generics are created equal. Some cost $5. Others cost $50-even though they contain the exact same active ingredient. Why? Because of how they’re bought.

Bulk Buying: The Power of Volume

Insurers don’t buy one prescription at a time. They buy in bulk-millions of pills at once. When a health plan commits to purchasing 10 million tablets of metformin over a year, manufacturers compete to win that contract. The more volume, the lower the price. This isn’t theoretical. A single first generic version of a drug like lacosamide (Vimpat) saved over $1 billion in its first year alone, according to the FDA.

Insurers use this leverage to lock in prices for 1 to 3 years. They don’t just pick the cheapest bid-they pick the most reliable. A manufacturer that can deliver consistently, even during supply shortages, gets priority. That’s why some generics cost less than others: it’s not about quality. It’s about supply chain strength.

Tendering: The Silent Auction Behind Your Prescription

Tendering is the formal process insurers use to get those bulk prices. Think of it like an auction, but only manufacturers can bid. Insurers list a drug-say, atorvastatin (the generic for Lipitor)-and invite all approved makers to submit a price. The lowest bid wins. But it’s not always that simple.

Some insurers use tiered formularies. Generics go on Tier 1, with $0-$10 copays. But here’s the catch: 78% of Medicare Part D plans still put generics on higher tiers with $25-$60 copays, even though those drugs cost pennies to make. Why? Because pharmacy benefit managers (PBMs) often profit more from higher-priced generics.

The PBM Problem: Hidden Markups and Spread Pricing

Pharmacy benefit managers-like OptumRx, Caremark, and Express Scripts-act as middlemen between insurers and pharmacies. They’re supposed to negotiate lower prices. But many use a trick called “spread pricing.” Here’s how it works:

• The PBM tells the insurer: “We negotiated $15 for this generic.”
• The PBM pays the pharmacy $5.
• The PBM pockets the $10 difference.

This isn’t illegal. But it’s hidden. The insurer doesn’t know the real cost. The patient doesn’t know. And the manufacturer? They’re pressured to cut prices so low that some stop making the drug altogether. That’s what happened with albuterol inhalers in 2020-prices dropped below production cost, and 87% of hospitals ran out.

Studies from JAMA Network Open show that plan sponsors have no idea which generics are driving their costs. One drug might be priced at $40 when a cheaper, identical version exists for $3. That’s not a mistake. That’s a system designed to obscure value.

What Works Better? Transparency and Direct-to-Consumer Models

Some companies are cutting out the middleman entirely. Mark Cuban’s Cost Plus Drug Company, for example, sells generics at cost plus 15% markup. No spreads. No rebates. No secrets. A 2023 NIH study found these direct models save patients 76% on expensive generics and 75% on common ones. One patient paid $87 through insurance for a generic blood pressure pill. At Cost Plus, it was $4.99.

Same drug. Same manufacturer. Same pill. But one route saved $82.

Blueberry Pharmacy, another transparent model, charges flat monthly rates-$15 for blood pressure meds, $10 for cholesterol. No insurance surprises. No copay changes. 4.7 out of 5 stars on Trustpilot from over 1,200 reviews.

Why Your Insurance Might Not Be Saving You

Most people assume using insurance saves money on generics. But for many, it doesn’t. A GoodRx user reported saving $32 a month by ignoring insurance and paying cash. Why? Because cash prices at pharmacies like Walmart or Costco are often lower than the insurer’s negotiated rate.

In 2020, 97% of all cash payments for prescriptions were for generics-even though only 4% of prescriptions were paid in cash. That tells you something: when insurance doesn’t help, people pay out of pocket.

And it’s not just individuals. Medicare Part D plans now pay 80% less for generics than they did in 2007. But that’s because they’ve learned to negotiate. Employers and self-insured plans? They’re still lagging.

What Insurers Are Doing Right

The smart ones don’t just rely on PBMs. They audit their formularies quarterly. They ask: Which generics are costing us the most? Are there cheaper alternatives? Are we paying for a brand-name drug disguised as a generic?

One employer in Ohio switched from a traditional PBM to a transparent model and cut generic costs by 22% in one year. Another replaced a high-cost generic with a lower-cost version that had the same FDA approval-saving $1.2 million annually.

They also use Maximum Allowable Cost (MAC) lists-price caps on generics. But here’s the problem: insurers rarely see the MAC list. The PBM controls it. And sometimes, the MAC is set higher than the actual market price. That’s how overpayment happens.

The Future: More Transparency, More Savings

The Inflation Reduction Act of 2022 didn’t fix the PBM problem. It kept the same broken incentives. But new rules from CMS in January 2024 require Medicare Part D plans to disclose PBM pricing details. That’s a start.

California’s Senate Bill 17, passed in 2017, forced PBMs to reveal spreads over 5%. Other states are following. And companies like Navitus Health Solutions are showing that transparent PBM models can cut generic costs by 22% compared to traditional ones.

By 2035, experts estimate improved tendering and bulk buying could save the U.S. healthcare system another $127 billion. But only if insurers stop trusting opaque systems and start demanding real data.

What You Can Do

If you’re on insurance and paying for generics:

1. Check GoodRx or SingleCare before filling a prescription. You might pay less without insurance.
2. Ask your pharmacist: “Is there a cheaper version of this drug?”
3. If you’re an employer or plan sponsor: demand access to your MAC lists and audit your formulary every six months.
4. Support policies that require PBM transparency.

Generics aren’t cheap because they’re generic. They’re cheap because someone fought for it. Right now, that fight is mostly happening behind the scenes. But it doesn’t have to be.