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

Generic drugs make up 90% of all prescriptions filled in the U.S., but they’re not always cheap. While they cost 80-85% less than brand-name drugs on average, many Americans still struggle to afford them. Why? Because the U.S. doesn’t directly set prices for generics like most other wealthy countries do. Instead, it relies on a patchwork of rules, rebates, and market competition - with mixed results.

How Medicaid Keeps Generic Prices Low

The biggest force holding down generic drug prices isn’t Congress or the FDA - it’s Medicaid. Since 1990, the Medicaid Drug Rebate Program (MDRP) has forced drugmakers to pay back a portion of what they charge states for every generic drug sold. The rebate is calculated quarterly and must be the greater of 23.1% of the Average Manufacturer Price (AMP) or the difference between AMP and the lowest price offered to any commercial buyer.

In 2024, these rebates totaled $14.3 billion, making up 78% of all Medicaid drug rebates. That money doesn’t go to patients directly - it goes back to state Medicaid programs. But the effect is real: because manufacturers know they’ll have to refund a big chunk of their sales, they’re less likely to jack up prices. For example, a generic blood pressure pill that might cost $50 without rebates often sells for under $10 because of this pressure.

Medicare Part D and the Out-of-Pocket Cap

For seniors on Medicare, generic drug costs changed dramatically in 2025. Before then, beneficiaries paid 25% coinsurance during the initial coverage phase and faced no annual cap. Now, thanks to the Inflation Reduction Act (IRA), the maximum out-of-pocket cost for all drugs - brand and generic - is capped at $2,000 per year.

This has been a game-changer for people taking multiple generics. A diabetic on insulin, metformin, and lisinopril used to pay hundreds each month. Now, once they hit $2,000, the rest is covered. Low-Income Subsidy (LIS) beneficiaries pay even less: between $0 and $4.90 per generic prescription. That’s down from $12.15 for brand-name drugs under the same plan.

But here’s the catch: the $2,000 cap doesn’t mean the drug costs $2,000. It means your total spending - including what your plan pays - hits that number. So if your plan negotiates a lower price with the manufacturer, your out-of-pocket cost drops faster. That’s why some people pay $0 for generics while others pay $45, depending on their plan’s deal.

The 340B Program: Cheap Drugs for the Poor

If you get care at a community health center, a rural hospital, or a clinic that serves low-income patients, you’re likely benefiting from the 340B Drug Pricing Program. Created in 1992, it requires drugmakers to sell outpatient medications - including generics - at steep discounts to qualifying providers.

The average discount? Between 20% and 50% below AMP. For a $10 generic, that’s $2 to $5 off. That’s huge when you’re living paycheck to paycheck. A 2025 survey from the Community Health Center Association found that 87% of clinics saw better medication adherence after implementing 340B discounts.

But here’s the problem: not all pharmacies participate. If you’re on 340B and your local pharmacy doesn’t, you might have to go out of your way to get your meds at the discounted rate. And some PBMs (pharmacy benefit managers) have been accused of taking a cut of those savings instead of passing them on to patients.

Why Generic Prices Still Spike - and How It Happens

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

Take pyrimethamine (Daraprim), a life-saving drug for toxoplasmosis. In 2024, only two companies made it. When one stopped producing it, the other raised the price by 300%. No one could buy it cheaper. That’s not a glitch - it’s how the system works. The government doesn’t step in to prevent price hikes unless a drug is deemed essential and has very few makers.

The same thing happened with doxycycline, a common antibiotic. When one major manufacturer left the market, prices jumped 500% overnight. The FDA knew about it - they even warned the public - but they couldn’t force a company to make it. That’s the flaw in relying on competition alone: when competition vanishes, so do low prices.

How the U.S. Compares to Other Countries

Most developed countries - Canada, Germany, the U.K. - have government agencies that directly negotiate or set drug prices. The U.K.’s NICE evaluates whether a drug is worth its cost. Germany uses a reference pricing system: if a generic is priced higher than similar drugs, it gets kicked off the public formulary.

The U.S. does none of that. Instead, we rely on volume. We have more generic manufacturers than any other country, and we approve new generics faster. In 2024, the FDA approved 1,247 new generics. That’s why 90% of prescriptions are filled with generics here - compared to 65% in Europe.

But here’s the kicker: even with all that competition, U.S. generic prices are still 1.3 times higher than the average of 32 other OECD countries. Why? Because we lack centralized buying power. The VA, which negotiates directly for veterans, gets discounts of 40-60%. Medicare, which covers 65 million people, can’t do the same - until now.

Medicare’s New Power to Negotiate (Even for Generics)

The Inflation Reduction Act didn’t just cap out-of-pocket costs. It gave Medicare the power to negotiate prices for the most expensive drugs - and starting in 2027, that includes some generics.

CMS selected 15 drugs for the second round of negotiations in 2026, and two of them are generic versions of blood thinners: apixaban (Eliquis) and rivaroxaban (Xarelto). Together, they cost Medicare $40.7 billion in 2025. Analysts predict prices could drop 25-35% after negotiations.

This is historic. For the first time, the federal government is directly controlling the price of a generic drug in the commercial market. It’s not a blanket rule - just for these few high-cost, high-volume generics. But it sets a precedent. If it works, more could follow.

Who’s Against Government Control - and Why

Drugmakers aren’t happy. The Pharmaceutical Research and Manufacturers of America (PhRMA) sued the government over a proposed Most-Favored-Nation pricing rule that would tie U.S. prices to those in other countries. They argue it’s a “taking” under the Fifth Amendment - basically, the government is stealing their profits.

Industry leaders like David Epstein, former CEO of Novartis, warn that too much price control could hurt innovation. He points out that 70% of generic manufacturers operate on margins below 15%. If prices drop further, some might stop making low-volume drugs - the ones people with rare conditions rely on.

The Academy of Managed Care Pharmacy (AMCP) says regulation creates “unintended consequences.” Instead, they want to remove barriers to competition - like speeding up FDA approvals and stopping brand companies from tweaking their drugs just to delay generics.

But critics like Dr. Peter Bach from Memorial Sloan Kettering say that’s not enough. He points out the U.S. pays 138% more for generics than other rich countries. “We have the population size to negotiate,” he told the Senate. “We just choose not to.”

What Patients Really Experience

Real people don’t care about AMP or rebates. They care about what’s on their receipt.

Mary Johnson, a 68-year-old retiree in Florida, pays $15 a month for her generic lisinopril - until her pharmacy switches to a different manufacturer. Suddenly, her copay jumps to $90. Why? Because her plan’s formulary changed. She didn’t get a notice. She just got charged more.

A 2025 Consumer Reports survey found that 22% of patients were hit with surprise generic drug costs over $50 - even with insurance. That’s because PBMs, the middlemen between insurers and pharmacies, keep rebates secret. The Senate HELP Committee found that 68% of generic drug “savings” never reach the patient. They’re used to lower premiums or pad PBM profits.

On Reddit, a pharmacy technician wrote: “I see Medicare patients pay $0 for generics one week, $45 the next. It’s random. No one understands it.”

What You Can Do Right Now

You don’t have to wait for Congress to fix this. Here’s what actually works:

• Use the Medicare Plan Finder tool. Compare plans every year. A $0 premium plan might have a $45 copay for your generic - another might have $10.
• Ask your pharmacist if there’s a 340B pharmacy nearby. Many community clinics offer discounts even if you’re not a patient.
• Switch to mail-order pharmacies. They often have lower copays for maintenance drugs.
• Check GoodRx or SingleCare. Sometimes the cash price is lower than your insurance copay.
• Call your insurer if your copay jumps. Ask why. They’re required to explain.

The Bottom Line

The U.S. doesn’t regulate generic drug prices the way other countries do. But it doesn’t leave them totally to the market either. Medicaid rebates, Medicare caps, 340B discounts, and now direct negotiation - these are all forms of government control. They’re not perfect. Prices still spike. Patients still get surprised. But the system is changing.

The real question isn’t whether the government should control prices. It’s how much control is enough - and who pays the price when it’s too little.