How Insurers Choose Which Generics to Cover

When you pick up a prescription at the pharmacy, you might not think about why your insurer covers one generic drug but not another-even if they do the same thing. The truth is, insurers don’t just pick generics at random. There’s a detailed, systematic process behind it, and it’s designed to save money without sacrificing care. This is how they decide.

It Starts with the FDA

Before any insurer even looks at a generic drug, the FDA has already approved it. That’s the first gate. To be considered, a generic must contain the exact same active ingredient as the brand-name version, work the same way in the body, and meet the same quality standards. The FDA calls this "therapeutic equivalence." If a drug doesn’t have that label, insurers won’t even consider it for coverage.

But here’s the catch: not all generics are created equal in practice. Some are made by manufacturers with better consistency, while others might have slight differences in inactive ingredients that affect how they’re absorbed. Insurers rely on the FDA’s rating system to know which ones are truly interchangeable.

The Role of Pharmacy & Therapeutics (P&T) Committees

Every major insurer-whether it’s Medicare, UnitedHealthcare, or a local Blue Cross plan-has a Pharmacy & Therapeutics committee. These are groups of doctors, pharmacists, and sometimes patient advocates who meet regularly to review which drugs get covered. They don’t make decisions based on price alone. They look at three things:

• Clinical effectiveness: Does the drug actually work? Are there studies showing it helps patients live longer, feel better, or avoid hospital visits?
• Safety: Does it have fewer side effects than other options? Are there known risks for older adults, people with kidney issues, or pregnant patients?
• Cost-effectiveness: If two drugs work just as well, but one costs 80% less, the cheaper one usually wins.

These committees don’t just look at clinical trials. Increasingly, they’re using real-world data-like how patients actually respond after the drug is on the market. Dr. Richard Baron, a leading voice in healthcare quality, says insurers now track outcomes from millions of prescriptions to see which generics deliver the best results in everyday use.

Tiered Formularies: Where Generics Always Win

Insurers organize their drug lists into tiers. Think of them like pricing levels. The lower the tier, the less you pay at the pharmacy.

Generics almost always land in Tier 1. In fact, according to CMS data from 2023, 92% of Medicare Part D plans use a structure where only generics are in Tier 1. That means:

• Most people pay $0 to $15 for a 30-day supply of a generic
• Brand-name drugs often cost $40 to $100+
• Specialty drugs (like those for cancer or MS) can run over $500

Why? Because generics save money. Since 2007, Medicare Part D plans alone have saved over $1.6 trillion by using generics. In 2019, that number hit $141 billion in a single year. Those savings help keep premiums lower for everyone.

Why Some Generics Are Still Not Covered

Even if a drug is FDA-approved and cheap, it might not be on your plan’s list. Here’s why:

• Too many similar options: If there are five equally effective generics for high blood pressure, insurers may only cover two-the cheapest and the one with the best safety record.
• Manufacturer deals: Some drugmakers pay insurers to prioritize their product. This isn’t illegal, but it can influence which generics make the cut.
• Formulary gaps: New generics can take months to get added. If a drug just came out last year, your insurer might still be reviewing it.

There’s also a hidden layer: therapeutic substitution. Some plans automatically swap your brand-name drug for a generic-even if your doctor didn’t prescribe it. In 78% of commercial plans, pharmacists can make this switch at the counter. But that doesn’t always go smoothly. A 2023 survey found 31% of patients reported side effects after switching to a substituted generic they hadn’t tried before.

What Happens When Your Drug Isn’t Covered?

If your prescription isn’t on the formulary, you’re not stuck. You can request an exception. This isn’t a long, complicated process. You or your doctor just need to submit a short form explaining why:

• The covered generic caused bad side effects
• You tried it and it didn’t work
• You need a higher dose than the insurer allows

Insurers are required to respond within three business days. For urgent cases (like cancer or heart conditions), they must respond in one day. If they don’t respond? The request is automatically approved. The Patient Advocate Foundation found that 78% of people who appealed a denial eventually got coverage.

The Bigger Picture: Costs, Shortages, and Future Changes

The U.S. generic drug market was worth $81.8 billion in 2022 and is expected to hit $112.6 billion by 2027. Five companies-Teva, Sandoz, Mylan, Apotex, and Sun Pharma-control nearly half of it. Their production choices directly affect what’s available on formularies.

But there’s a growing problem: drug shortages. As of October 2023, the FDA listed 372 active shortages, and 78% of them were generics. When a popular generic runs out, insurers scramble to find replacements. Sometimes, they switch to a different manufacturer. Other times, they temporarily lift restrictions on a brand-name drug.

Looking ahead, two big changes are coming:

• The Inflation Reduction Act: Starting in 2025, Medicare Part D beneficiaries won’t pay more than $2,000 out of pocket for drugs in a year. This pushes insurers to focus even more on low-cost generics to keep total spending down.
• Complex generics: The FDA is speeding up approval for hard-to-make generics like inhalers and insulins. That means more options could hit formularies soon.

Still, uncertainty remains. P&T committees are starting to see AI-driven personalized generics in development-drugs tailored to a patient’s genes or health history. But how do you price or compare those? No one has a clear answer yet.

What Patients Should Know

You don’t need to be an expert to navigate this system. Here’s what actually helps:

• Ask your pharmacist: "Is this generic covered? If not, what’s the next option?"
• Check your plan’s formulary online. Most insurers list them in the member portal.
• If a drug isn’t covered, ask your doctor to file an exception. It’s easier than you think.
• Don’t assume all generics are the same. If you had a bad reaction to one, tell your doctor-it might be the manufacturer, not the drug.

The system isn’t perfect. Transparency is still low-only 37% of insurers publicly share their full decision criteria. But it works. Eighty-seven percent of all prescriptions filled in the U.S. are generics. That’s because insurers have built a system that rewards value: safe, effective, and affordable.