Most people think pharmacies make more money off expensive brand-name drugs. That’s not true. In fact, the opposite is happening: pharmacies make the vast majority of their profit from cheap generic drugs-even though those generics make up only about 25% of total drug spending in the U.S. This strange math is at the heart of today’s pharmacy business model, and it’s putting independent pharmacies under serious pressure.
Why Generics Are the Real Profit Engine
Generic drugs account for about 90% of all prescriptions filled in the U.S., but they only make up a quarter of total drug spending. Why? Because brand-name drugs cost hundreds or even thousands of dollars per pill, while generics often cost less than $5. But here’s the twist: pharmacies earn 42.7% gross margin on generics, compared to just 3.5% on brand-name drugs. That means for every $100 spent on a generic drug, the pharmacy pockets around $42 in gross profit. For a brand-name drug, they get about $3.50.
This isn’t a mistake. It’s how the system was built. The Hatch-Waxman Act of 1984 created a fast-track approval process for generics, encouraging competition. With multiple manufacturers making the same drug, prices dropped. Pharmacies responded by marking up those low-cost drugs by a high percentage. It’s basic math: if a pill costs $0.50, a 40% markup is $0.20. If a pill costs $100, a 3.5% markup is only $3.50. So even though brand drugs bring in more total revenue, generics bring in more profit per prescription.
The Hidden Players: PBMs and Spread Pricing
But pharmacies don’t get to keep all that $42. The real money is being made upstream-by pharmacy benefit managers (PBMs). These are the middlemen between insurers, pharmacies, and drug manufacturers. They negotiate drug prices, set reimbursement rates, and manage formularies. And they’ve built a business model around something called “spread pricing.”
Here’s how it works: A PBM tells an insurance plan it will pay $10 for a generic drug. But when the pharmacy fills the prescription, the PBM only reimburses the pharmacy $8. The $2 difference? That’s the PBM’s profit. And they don’t always tell the pharmacy or the patient about it. This practice, called “spread pricing,” has become so common that the Federal Trade Commission is now investigating it as a potential antitrust violation.
Worse, some PBMs use “clawbacks.” If the pharmacy gets reimbursed $8 but later finds out the actual cost of the drug was $6, the PBM demands the $2 back. That means the pharmacy loses money on a transaction they thought was profitable. Independent pharmacies report clawbacks eating into their already thin margins-sometimes wiping out their entire profit on a single prescription.
Why Independent Pharmacies Are Struggling
Chain pharmacies like CVS or Walgreens have leverage. They’re big enough to negotiate better terms with PBMs. They’ve even bought their own PBMs. But independent pharmacies? They’re stuck. According to the National Community Pharmacists Association, the average gross margin on generics fell from 24.6% in 2015 to just 19.8% in 2022. Meanwhile, rent, staff wages, and insurance costs kept rising.
One Ohio pharmacy owner told Pharmacy Times: “My net profit on generics has dropped from 8-10% five years ago to barely 2% now, while my overhead has increased 35%.” That’s not uncommon. In fact, 68% of independent pharmacy owners say declining generic reimbursement is their biggest threat. Between 2018 and 2023, about 3,000 independent pharmacies closed. That’s nearly one out of every five.
It’s not just about reimbursement. Some generics have gone from competitive markets to single-source monopolies. When only one company makes a generic drug, prices spike. In some cases, the generic now costs more than the brand-name version. That’s not a typo. A 2024 white paper from SureCost documented cases where patients paid more for a generic than the brand because there was no competition left to drive prices down.
Where the Real Money Is: Mail-Order and Specialty Pharmacies
Not all pharmacies are created equal. Mail-order pharmacies-those that ship prescriptions by mail-make far more on generics than local stores. One analysis found that for certain drugs, mail-order pharmacies earned up to 1,000 times more margin on generics than small retail pharmacies. For brand drugs, the difference was 35 times higher.
Specialty pharmacies are another story. These handle complex, high-cost drugs for conditions like cancer or rheumatoid arthritis. They don’t rely on volume. Instead, they charge for services: medication management, patient education, coordination with doctors. Their margins are higher and more stable. That’s why big pharmacy chains are shifting resources into specialty services. It’s not just about selling pills anymore-it’s about selling care.
What’s Changing? New Models Are Emerging
Some pharmacies are fighting back. Mark Cuban’s Cost Plus Drug Company charges a flat $20 for most generics plus a $3 dispensing fee. No spreads. No clawbacks. Just transparency. As of mid-2024, they’ve filled over a million prescriptions. Amazon Pharmacy now offers many generics for $5, with clear cost breakdowns showing what the drug actually costs and what they charge.
Other pharmacies are going direct. Instead of relying on PBMs, they contract directly with employers or offer cash-pay options for select drugs. One pharmacy in Iowa started offering $10 insulin, $5 statins, and $10 metformin-no insurance needed. Their net margin jumped from 1.5% to 4.8% in just six months.
Some are also adding services. Medication Therapy Management (MTM) programs-where pharmacists review all a patient’s meds to catch interactions or redundancies-are now reimbursed by Medicare. Pharmacies that offer MTM report 3-5% higher net profits. The National Community Pharmacists Association’s Rebuttal Academy has trained over 8,500 pharmacy staff to challenge unfair PBM reimbursement decisions. It’s not easy, but it’s working for some.
The Future: Consolidation, Regulation, and Uncertainty
The top five generic manufacturers now control 45% of the market-up from 32% in 2015. The FTC has filed multiple antitrust lawsuits against generic drug makers for price-fixing. Meanwhile, states like California, Texas, and Illinois have passed laws forcing PBMs to disclose their reimbursement formulas. The Inflation Reduction Act’s drug price negotiation rules, starting in 2026, could lower overall drug costs-but it’s unclear how that will affect generic margins.
Experts predict that without reform, another 20-25% of independent pharmacies will close by 2027. But those that adapt-by offering services, cutting out middlemen, or joining cooperative networks-can survive. The old model of relying on high-margin generics is crumbling. The new model? It’s about value, not volume.
Pharmacies aren’t just drug sellers anymore. They’re health partners. And if they want to stay open, they’ll need to prove it.
Why do pharmacies make more profit on cheap generics than expensive brand-name drugs?
Pharmacies earn higher percentage markups on low-cost generics because the dollar amount of profit adds up faster. For example, a $0.50 generic with a 40% markup yields $0.20 profit. A $100 brand-name drug with a 3.5% markup only yields $3.50. Even though brand drugs cost more overall, the volume and markup structure of generics create far greater total profit for pharmacies.
What is spread pricing, and why is it controversial?
Spread pricing is when a pharmacy benefit manager (PBM) charges an insurance plan one price for a drug but pays the pharmacy a lower amount, keeping the difference as profit. For example, the PBM bills the insurer $12 for a generic, pays the pharmacy $8, and pockets $4. Patients and pharmacies often don’t know the true cost. This practice is controversial because it hides the real price of drugs and reduces pharmacy revenue, leading to investigations by the FTC and new state laws demanding transparency.
How do clawbacks hurt independent pharmacies?
Clawbacks happen when a pharmacy is reimbursed for a generic drug, but later the PBM discovers the actual cost was lower. The PBM then demands the difference back from the pharmacy. This turns a profitable transaction into a loss. For pharmacies already operating on razor-thin margins, clawbacks can wipe out entire weekly profits and are a major reason why many independent pharmacies are closing.
Why are some generic drugs more expensive than brand-name drugs?
When only one manufacturer produces a generic version of a drug-called a single-source generic-there’s no competition to drive prices down. In these cases, the manufacturer can raise prices significantly. Some generics have become more expensive than their brand-name counterparts, especially for older drugs with low demand. This undermines the entire purpose of generics and has led to price spikes and shortages.
What can pharmacies do to survive under current margin pressures?
Successful pharmacies are shifting away from pure volume-based models. They’re adding services like Medication Therapy Management (MTM), which Medicare reimburses. Others are cutting out PBMs entirely by contracting directly with employers or offering cash-pay options for common drugs. Some are joining cooperatives to gain buying power. Pharmacies that focus on patient care-not just dispensing pills-are seeing net margins rise to 4-6%, even as traditional models collapse.