How Government Controls Generic Drug Prices in the U.S. Today

When you pick up a prescription for generic lisinopril or metformin, you might assume the price is set by the market-simple supply and demand. But behind that $4 copay is a complex web of federal rules, rebate systems, and hidden negotiations that shape exactly what you pay. The U.S. doesn’t directly set prices for generic drugs like many other countries do. Instead, it uses a patchwork of programs to push prices down-sometimes effectively, sometimes not.

How Medicaid Drives Down Generic Prices

The biggest force keeping generic drug prices low isn’t competition alone-it’s Medicaid. Since 1990, the Medicaid Drug Rebate Program (MDRP) has forced drugmakers to pay rebates to states for every generic drug sold to Medicaid patients. The math is straightforward: manufacturers must pay back either 23.1% of the average price they charge wholesalers, or the difference between that price and the lowest price they offer to any private buyer-whichever is higher.

In 2024, these rebates totaled $14.3 billion, and 78% of that came from generic drugs. That’s not charity-it’s a legal requirement. Without it, many generic manufacturers would charge more. The system works because Medicaid is the largest single buyer of drugs in the country. If a company wants to sell to Medicaid, they have to play by the rules. And because most manufacturers sell to Medicaid, they end up offering that same low price to everyone else just to avoid price discrimination.

Medicare Part D and the Out-of-Pocket Cap

For seniors on Medicare Part D, the story is different. Before 2025, beneficiaries paid 25% of the cost for generics during the initial coverage phase, and many faced steep bills once they hit the coverage gap. But the Inflation Reduction Act changed that. Starting in 2025, no Medicare beneficiary pays more than $2,000 a year out of pocket for all their drugs-generic or brand-name.

That cap has had an immediate effect. In 2024, the average Medicare user spent $412 a year on generics. By 2025, that number dropped to $327. For low-income beneficiaries enrolled in the Low-Income Subsidy (LIS) program, many pay $0 for generics. The average copay? Just $4.90. That’s not because the drug is cheap-it’s because the government absorbs the rest.

But here’s the catch: the price you see at the pharmacy counter isn’t always the real price. PBMs (pharmacy benefit managers) negotiate rebates with manufacturers behind the scenes, and most of that money never reaches you. A 2025 Senate report found that 68% of generic drug “savings” from rebates stay with PBMs and insurers, not patients.

The 340B Program: Hidden Discounts for the Poor

If you’re uninsured or underinsured and get care at a community health center, you might be benefiting from the 340B Drug Pricing Program. Created in 1992, this program requires drugmakers to sell outpatient medications-including generics-at steep discounts to hospitals and clinics that serve low-income populations. The discounts? Typically 20% to 50% below the average market price.

In 2025, 87% of safety-net clinics reported that 340B discounts improved patient adherence to medications. A diabetic on metformin might pay $5 a month instead of $30. A heart patient on generic atorvastatin might get it for free. But here’s the problem: the program doesn’t regulate how much those clinics charge patients. Some pass on the full savings. Others charge full price and pocket the difference. There’s no transparency.

Why Generic Prices Still Spike

You’d think that with 1,500 manufacturers making over 10,000 generic drugs, prices would always be low. But that’s not true when competition disappears.

Take pyrimethamine (Daraprim), a 70-year-old drug used to treat parasitic infections. In 2024, only two companies made it. When one of them stopped production, the remaining manufacturer raised the price by 300%. No one could challenge them. The same thing happened with doxycycline, a common antibiotic, when only three manufacturers remained. Prices jumped 1,000% in two years.

These aren’t rare cases. The FDA tracks “low-competition generics”-drugs with fewer than three manufacturers. In 2025, there were 217 of them. Prices for these drugs rose an average of 500% over five years. The government doesn’t step in to prevent these spikes. It relies on competition to fix itself-and sometimes, it doesn’t.

Medicare’s New Drug Price Negotiation (And Why Generics Are Mostly Exempt)

The Inflation Reduction Act gave Medicare the power to negotiate prices for certain high-cost drugs. The first 10 were selected in 2026, mostly brand-name drugs like insulin and blood thinners. In 2027, the list expands to 15 drugs-including generic versions of Eliquis and Xarelto. These aren’t new generics. They’re the same drugs, just off-patent. But they’re still expensive because of how they’re packaged and sold.

Why target these? Because even though they’re generic, they’re used by millions. Eliquis alone costs Medicare $12 billion a year. If negotiation brings down the price by 30%, that’s $3.6 billion saved annually.

But most generics are still off-limits. Why? The government says they’re already cheap because of competition. The problem? That assumption breaks down when only one or two companies make the drug. Critics argue Medicare should negotiate on all generics with fewer than three manufacturers. So far, they haven’t.

How the U.S. Compares to Other Countries

In Canada, the UK, and Germany, governments directly set or negotiate generic drug prices. The UK’s NICE agency decides what’s worth paying for. Germany ties prices to how effective a drug is. In both cases, prices are lower-and more stable.

The U.S. pays 1.3 times more for generics than the average of 32 other wealthy countries, according to a 2025 KFF analysis. But here’s the twist: U.S. patients get generics faster. Ninety percent of prescriptions are filled with generics, compared to 65% in Europe. That’s because the FDA approves generics quickly once patents expire.

The trade-off? Price volatility. In Europe, prices stay steady. In the U.S., they can skyrocket overnight if a manufacturer quits the market. There’s no safety net.

Who’s Winning and Who’s Losing

Big generic manufacturers like Teva and Mylan benefit from the current system. They make billions by producing high-volume, low-margin drugs. But small manufacturers? Many can’t survive. Profit margins for generic makers average under 15%. When a drug’s price drops too far, they stop making it.

Patients on fixed incomes win when rebates work. But those who switch pharmacies or plans often get hit with surprise bills. One Florida retiree paid $15 a month for her generic lisinopril-until her pharmacy switched to a different manufacturer with a higher copay. She got a $90 bill. No warning. No explanation.

Pharmacists are caught in the middle. Independent pharmacies spend nearly 12 hours a week just managing Medicaid and Medicare claims. That’s time they could spend counseling patients.

What’s Changing in 2026 and Beyond

The next big shift? More Medicare negotiation. The 2027 list includes generic versions of top-selling drugs. If successful, it could set a precedent. Experts predict prices for those generics could drop 25-35%.

Congress is also considering rules to require manufacturers to report when they stop making a drug. That way, if only one company is left, the government could step in before prices spike.

The FDA’s Drug Competition Action Plan has helped speed up generic approvals by 37%. But it hasn’t fixed the core problem: when competition vanishes, so does price control.

For now, the system works best for drugs with many makers-like statins or blood pressure pills. For the rest? It’s a gamble. And the person paying at the counter is the one who loses when the odds turn bad.