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. But behind every covered medication is a detailed, data-driven process that balances cost, safety, and effectiveness. Insurers don’t pick generics randomly. They use a system built over decades - and it affects what you pay, what you get, and sometimes even whether you can get the medicine you need.

How Formularies Work

Every health plan has a formulary - a list of drugs it agrees to cover. This isn’t just a catalog. It’s a tiered system designed to guide patients toward the most cost-effective options without sacrificing care. Generics almost always land in Tier 1, the lowest cost-sharing tier. That means you’ll pay $0 to $15 for a 30-day supply, compared to $40 or more for brand-name drugs in higher tiers. In fact, 92% of Medicare Part D plans use this exact structure, according to CMS data from 2023. Private insurers like UnitedHealthcare, Cigna, and Humana follow nearly the same model. The goal? Keep out-of-pocket costs low while encouraging the use of drugs that work just as well - but cost 80% to 85% less.

The Pharmacy & Therapeutics (P&T) Committee

The real decision-makers aren’t insurance agents or CEOs. They’re Pharmacy & Therapeutics (P&T) committees. These are panels of doctors, pharmacists, and health economists who review every drug before it gets added to a formulary. Their job isn’t to cut costs at all costs. It’s to find the best balance between clinical value and affordability.

These committees look at three things:

• Clinical effectiveness: Does the drug actually work? Studies, real-world data, and patient outcomes matter more than marketing claims.
• Safety: What are the side effects? Drugs with known risks or high rates of adverse reactions get flagged - even if they’re cheap.
• Cost-effectiveness: If two generics do the same thing, the cheaper one wins. But if a slightly more expensive generic has fewer side effects or better dosing, it might get the nod.

All drugs must first be FDA-approved. That’s the baseline. But approval alone doesn’t guarantee coverage. A drug might be safe and effective, but if it’s not significantly better than what’s already on the formulary, it won’t make the cut.

Why Some Generics Get Rejected

You might wonder: if a generic is FDA-approved and cheaper, why wouldn’t it be covered? The answer is often about redundancy. Insurers don’t need five versions of the same blood pressure pill. If three generics are already on the formulary and work just as well, adding a fourth - even if it’s slightly cheaper - doesn’t add value. It just adds complexity.

Also, some generics come from manufacturers with poor quality control. Insurers track drug performance across pharmacies. If a certain generic keeps showing up in reports of inconsistent absorption or patient complaints, it gets pulled - even if it’s technically FDA-approved. In 2023, the FDA reported 372 active drug shortages, and 78% of them were generics. When supply is unstable, insurers avoid listing those drugs to prevent patients from showing up at the pharmacy and finding nothing on the shelf.

Therapeutic Substitution: When Your Doctor’s Prescription Gets Changed

One of the most frustrating parts of the system is therapeutic substitution. This is when your pharmacy automatically switches your brand-name drug for a generic - even if your doctor didn’t specify it. In 78% of commercial insurance plans, this happens at checkout. It’s legal, common, and designed to save money.

But here’s the catch: not all generics are created equal. A 2023 Drug Topics survey found that 31% of patients reported adverse effects after being switched to a different generic. For example, a patient on a specific generic version of levothyroxine for hypothyroidism might feel fine - until the pharmacy switches to another brand, and their thyroid levels go haywire. That’s because while the active ingredient is the same, inactive ingredients (like fillers or coatings) can vary between manufacturers and affect how the drug is absorbed.

Doctors often don’t know this is happening. Patients, meanwhile, feel blindsided. That’s why some states - like Washington - require insurers to notify patients before switching, and allow doctors to write “Do Not Substitute” on prescriptions.

What Happens When Your Drug Isn’t Covered?

If your prescribed generic isn’t on the formulary, you’re not stuck. You can file an exception request. All plans must allow this. You’ll need:

• A letter from your doctor explaining why the covered alternative won’t work for you
• Proof that you tried a similar drug and had bad side effects
• Documentation that the drug you need is medically necessary

Insurers have three business days to respond. If they don’t, your request is automatically approved - a rule enforced by CMS. The Patient Advocate Foundation found that 78% of patients who appealed a denial eventually got coverage. But the process takes time. And for people with chronic conditions, even a few days without medication can be risky.

Who’s Winning and Who’s Losing?

The system works well for most people. Eighty-seven percent of all prescriptions in the U.S. are for generics - a sign that insurers have successfully pushed adoption. Medicare beneficiaries report high satisfaction with predictable, low costs for generic drugs. In 2023, 82% said they understood their generic drug costs clearly.

But the system has blind spots. Critics like Dr. Aaron Kesselheim from Harvard point out that insurers sometimes favor older, cheaper generics over newer ones that might be better for specific patient groups - like seniors with kidney disease or people with rare allergies. And while the Inflation Reduction Act caps out-of-pocket drug spending at $2,000 for Medicare Part D starting in 2025, it may push insurers to double down on high-volume, low-cost generics, potentially squeezing out newer options.

Meanwhile, drug manufacturers are racing to keep up. The FDA is trying to cut generic approval times from 42 months to 10 months under GDUFA III. That could mean more choices on formularies. But it also means more complexity - and more pressure on P&T committees to evaluate drugs faster.

What You Can Do

If you’re on a generic drug and it’s not working:

• Ask your pharmacist if your medication was switched. Ask for the manufacturer name.
• If you notice side effects, talk to your doctor. Ask them to write “Do Not Substitute” on your prescription.
• If your drug isn’t covered, don’t accept “no” as the final answer. File an exception. Bring your doctor’s note. Be persistent.
• Check your plan’s formulary online. Most insurers update it quarterly. Know what’s covered before you refill.

The system isn’t perfect. But understanding how it works gives you power. You’re not just a policyholder - you’re a participant in a process that can be navigated, questioned, and improved.

What’s Next for Generic Coverage?

The future of generic coverage is changing fast. With the Inflation Reduction Act capping out-of-pocket costs for Medicare beneficiaries in 2025, insurers may shift focus from individual drug costs to total drug spend. That could mean even more pressure to use high-volume generics. Meanwhile, the FDA’s push to approve complex generics - like inhalers and insulins - faster could expand formulary options. But challenges remain: drug shortages, inconsistent quality, and lack of transparency in P&T decisions. For now, the system works best when patients are informed, doctors advocate, and insurers follow clear, evidence-based rules.