How Insurers Save Thousands on Generic Drugs Through Bulk Buying and Tendering

Most people think their insurance covers generic drugs cheaply. But here’s the truth: bulk buying and tendering is what actually keeps those prices low - and many insurers are still missing out on massive savings.

In 2023, generic drugs made up over 90% of all prescriptions filled in the U.S., yet they accounted for just 17% of total drug spending. That’s not magic. It’s strategy. Insurers and pharmacy benefit managers (PBMs) use bulk purchasing and competitive bidding to lock in prices far below what you’d pay at your local pharmacy. But not all systems work the same. Some save you money. Others pocket the difference.

How bulk buying cuts generic drug costs

Bulk buying isn’t just buying in large quantities. It’s about leverage. When an insurer signs a contract with a generic drug maker for 500,000 pills of a specific medication - say, metformin or lisinopril - they’re not paying retail. They’re negotiating a price based on volume. The more they commit to buy, the lower the cost per unit. It’s like Costco for prescriptions.

Take the case of lacosamide, a generic epilepsy drug. When its first generic version hit the market in 2022, it saved patients and insurers over $1 billion in the first year alone. That’s not rare. The FDA reports that the first generic version of any drug typically saves $5.2 billion in its first 12 months across all therapies. That’s because manufacturers compete to win the contract. The winner gets volume. The rest get nothing. That competition forces prices down - often by 80% to 90% from the original brand-name price.

Insurers don’t just buy one drug at a time. They group entire therapeutic classes - like all blood pressure meds, all cholesterol drugs, all diabetes pills - and open bids to every generic manufacturer that can meet quality standards. The lowest bid wins, but only if they can deliver consistent supply. That’s where tendering comes in.

Tendering: The silent auction behind your prescription

Tendering is the formal process of inviting bids. Think of it like a government contract for road construction - but for pills. Insurers publish a list of drugs they need, set minimum quality and supply requirements, and invite manufacturers to submit sealed bids. Contracts usually last one to three years. The insurer commits to buying a certain number of units. The manufacturer commits to delivering at a fixed price.

Here’s the kicker: the best savings come from drugs with multiple manufacturers. If five companies make the same generic, the bidding gets fierce. But if only one or two make it? That’s when prices creep up. That’s why insurers track how many manufacturers supply each drug. If a drug has only one source, they start looking for alternatives - even if they’re slightly different chemically but clinically the same.

That’s called therapeutic substitution. Instead of forcing patients to take the exact same pill, insurers switch them to a therapeutically equivalent drug that’s cheaper. For example, switching from one generic statin to another that’s $20 cheaper per month. No loss in effectiveness. Just savings. And it works. A 2022 JAMA Network Open study found that simple substitutions like this could cut generic drug spending by nearly 90% in some cases.

The PBM problem: Who’s really getting the discount?

But here’s where things get messy. Most insurers don’t buy drugs directly. They hire pharmacy benefit managers - companies like OptumRx, Caremark, and Express Scripts - to handle it for them. These PBMs claim to save money. But many use a hidden trick called “spread pricing.”

Spread pricing works like this: the PBM tells the insurer they’re paying $10 for a prescription. They tell the pharmacy they’re paying $15. Then they pocket the $5 difference. The insurer thinks they’re getting a deal. The pharmacy gets paid less. And the patient? They still pay their copay - even if the drug cost the PBM $10. That $5 spread? It’s pure profit. And it’s legal.

That’s why some people pay $87 out-of-pocket for a generic through insurance, but only $4.99 when they pay cash at Cost Plus Drug Company. The insurance system isn’t broken. It’s designed to hide the real cost. And the more opaque the system, the more the middlemen profit.

Transparent models: What actually works

There’s a better way. Companies like Cost Plus Drug Company and Navitus Health Solutions cut out the middleman entirely. Cost Plus Drug Company sells generic drugs at cost plus 15% markup - no spreads, no rebates, no secrets. They publish their prices openly. A 30-day supply of atorvastatin? $6.49. Metformin? $5.99. No insurance needed. No surprise bills.

And it’s catching on. By October 2023, Cost Plus Drug Company had expanded to 35 locations across 12 states. Blueberry Pharmacy, another transparent model, has a 4.7/5 rating on Trustpilot with over 1,200 reviews. One customer wrote: “My blood pressure medication costs exactly $15/month. No insurance surprises.”

Even Medicare is catching on. In 2024, CMS required all Medicare Part D plans to disclose how much PBMs are paid for each drug. That’s a big step toward transparency. But it’s not enough. Most commercial insurers still don’t require PBMs to show their pricing structure.

Why some generics cost more - even when they’re “generic”

Not all generics are created equal. Some have been on the market for years. Others are new. And some? They’re just expensive because no one else makes them.

Insurers use something called a Maximum Allowable Cost (MAC) list. This is the highest price they’ll reimburse for a generic drug. But here’s the problem: insurers rarely share these lists with their members. So you might see a $40 copay for a drug that the insurer only paid $8 for. The rest? Went to the PBM.

And then there’s the issue of shortages. When prices get squeezed too hard, manufacturers quit. In 2020, albuterol inhalers disappeared from shelves because the price dropped below the cost to make them. Eighty-seven percent of hospitals reported shortages. That’s what happens when you push for the lowest price without thinking about supply.

So the goal isn’t just the cheapest bid. It’s the most reliable one. That’s why insurers now track manufacturer reliability, production capacity, and geographic diversity. If all the metformin in the U.S. comes from just two factories in India? That’s a risk.

What patients can do right now

You don’t need to wait for your insurer to fix the system. Here’s what actually works:

• Check GoodRx or SingleCare before filling any prescription. Often, the cash price is lower than your insurance copay.
• Ask your pharmacist: “Is there a cheaper generic version?” Sometimes, two generics look identical on paper - but one costs half as much.
• If you’re on Medicare or have a high-deductible plan, consider switching to a transparent pharmacy like Cost Plus Drug Company. You don’t need insurance to use them.
• Review your formulary. If your insurer lists a generic drug as Tier 3 (higher copay), ask why. It might be because the PBM gets a bigger rebate on it - not because it’s better.

In 2023, Americans saved $445 billion using generics. But $194 billion of that came from adults aged 40 to 64 - the group most likely to be on multiple prescriptions. That’s not luck. That’s smart procurement.

Insurers save money by being strategic. Patients can too. It’s not about having insurance. It’s about knowing how the system works - and when to bypass it.

What’s next for generic drug pricing

The Inflation Reduction Act of 2022 didn’t fix the PBM problem. It left spread pricing intact. But new models are emerging. Navitus Health Solutions, a PBM that works directly with employers, reported 22% lower generic costs in 2023 than traditional PBMs. Why? They don’t take spreads. They charge a flat fee.

The FDA’s GDUFA III program, launched in 2023, is speeding up generic approvals. More approvals mean more competition. More competition means lower prices. The Congressional Budget Office estimates these changes could save $127 billion over the next decade.

But real change won’t come from laws. It’ll come from awareness. When patients demand transparency, insurers will be forced to choose between hidden profits and real savings. And right now, the best savings aren’t hidden at all. They’re right on the shelf - for $5, $10, or $15 - if you know where to look.

Insurers save money not by accident, but by design. They use volume, competition, and smart substitution to drive down costs. But if you’re paying more than $10 for a common generic, you’re not getting the deal they’re getting. The system works - if you know how to use it.