Medicare Part D Economics: How Programs Use Generics to Cut Costs

Medicare Part D isn’t just a drug benefit-it’s a massive economic engine built around one simple idea: generics save money. Since its launch in 2006, the program has filled over 10 billion prescriptions, and nearly 9 out of every 10 of those were for generic drugs. That’s not an accident. It’s the design. The entire structure of Part D is built to push beneficiaries toward cheaper, equally effective generic medications-and it works. But how exactly does it work? And why do some people still end up paying too much-even when generics are available?

How Tiered Formularies Drive Generic Use

Every Medicare Part D plan uses a tiered formulary, which is just a fancy way of saying they organize drugs into price levels. Think of it like a grocery store: the cheapest items are at the front, the most expensive are in the back. In Part D, Tier 1 is where you find preferred generics. These are the drugs that cost the least-often $0 to $10 for a 30-day supply at a preferred pharmacy. Tier 2 holds regular generics, usually around $15. Tier 3 is where brand-name drugs start showing up, often $45 or more. And if you need a specialty drug? That’s Tier 4 or 5, where prices can hit $100+.

The system is simple: lower copay = more likely to be picked. In 2023, 87.3% of all Part D prescriptions were for generics. That’s up from just 54.6% in 2006. Why? Because the financial incentive is clear. If your blood pressure med is $0 on Tier 1 but $45 on Tier 3, you’re going to choose the $0 option. And the plan? It saves money too. Generic drugs cost Part D plans an average of $18.75 per prescription. Brand-name drugs? $156.42. That’s an 88% cost difference.

The Hidden Math Behind Savings

Let’s say you take one generic medication that costs $10 a month. That’s $120 a year. If you took the brand-name version instead-say, $75 a month-that’s $900 a year. Just for one drug. Multiply that across millions of beneficiaries, and you’re talking billions in savings.

The numbers back it up. In 2023, Medicare Part D spent $198.4 billion total on prescriptions. Generics made up only 24.1% of that spending-even though they accounted for 87.3% of prescriptions. That’s the power of generics. They’re the workhorses of the system. Brand-name drugs, which make up just 12.7% of prescriptions, are responsible for 75.9% of the total cost.

The Inflation Reduction Act of 2022 added even more pressure on this system. Starting in 2025, beneficiaries won’t pay more than $2,000 out of pocket for drugs in a year. That sounds great, right? But here’s the twist: the cap kicks in after you’ve spent that much. So if you’re taking a high-cost brand-name drug, you might hit the cap faster. But if you’re on a generic, you’re less likely to hit it at all. That means the program saves even more when people stick with generics.

What Happens in the ‘Donut Hole’?

The coverage gap-also called the donut hole-used to be a nightmare. Back in 2019, beneficiaries paid 70% of the cost for brand-name drugs and 44% for generics during this phase. That meant people skipped doses, delayed refills, or went without meds entirely.

That changed with the Bipartisan Budget Act of 2018. Now, everyone pays 25% of the negotiated price for both brand-name and generic drugs during the coverage gap. That’s a huge win. But here’s the catch: the 25% is based on the plan’s negotiated price, not the list price. And for generics, that negotiated price is often way lower. So even though the percentage is the same, the actual dollar amount you pay for a generic is usually $5 or less. For a brand-name? It could be $50 or more.

In the catastrophic phase, the difference is even clearer. You pay the greater of 5% coinsurance or a flat copay: $4.15 for generics, $10.35 for brand-names. So if your generic costs $20, you pay $4.15. If your brand-name costs $200, you pay $10.35. The math still favors generics-even when you’re in the most expensive phase.

Why Some Generics Still Cost Too Much

Not all generics are created equal. That’s the problem.

Some plans put certain generics-especially specialty ones like those for autoimmune diseases or mental health-into higher tiers. Why? Because the manufacturer doesn’t offer a big enough discount to the plan. So even though the drug is chemically identical to the brand, you pay more. A 2023 CMS report found that 63.2% of beneficiaries would pay more if they switched plans without checking the formulary. That’s a trap. You think you’re on a good plan because your blood pressure med is $0. Then next year, it moves to Tier 2. Now it’s $15. No warning. No notice.

Another issue: therapeutic interchange. Pharmacists can automatically switch your brand-name drug to a generic-unless your doctor writes “dispense as written.” But 58.6% of generic fills happen this way. What if the generic causes side effects? You might not know until you feel worse. And if you’re on a protected class drug-like an antidepressant or immunosuppressant-you’re supposed to get all or nearly all options. But even then, plans can still limit access through prior authorization.

Who Benefits the Most?

Low-income beneficiaries get the biggest help. If you qualify for Extra Help (a federal program for people with limited income), you pay no more than $4.15 for generics and $10.35 for brand-names. No deductible. No coverage gap. Just low, predictable costs.

But even for those who don’t qualify, the savings are real. A 2023 Kaiser Family Foundation analysis found that beneficiaries using Tier 1 generics saved between $1,560 and $2,340 per year compared to using brand-name drugs. That’s more than the average Social Security increase in 2024.

And it’s not just about dollars. People who use generics are more likely to stick with their meds. A 2023 CAHPS survey showed 78.4% of beneficiaries were satisfied with their plan’s generic coverage. But here’s the dark side: 32.1% of low-income beneficiaries still skip doses because of cost-even when generics are available. That’s a system failure. The economics work. But the human cost? Still too high.

What You Can Do to Save More

You don’t have to guess. There are tools. The Medicare Plan Finder on Medicare.gov lets you compare plans side by side. Enter your drugs, your pharmacy, and it shows you exactly what you’ll pay. People who use it save an average of $427 a year.

Here’s how to use it:

1. Go to Medicare.gov/plan-compare
2. Enter your medications, including dosage and frequency
3. Filter for plans with $0 copays on Tier 1 generics at your preferred pharmacy
4. Check if your drugs are on formulary and what tier they’re in
5. Look for plans that don’t require prior authorization for your generics

Do this during Annual Enrollment Period (October 15 to December 7). Plans change every year. What was $0 last year might be $15 this year. Don’t assume.

If your generic causes side effects, request a “coverage determination.” You can ask your doctor to submit a letter saying you need the brand-name drug. CMS approves these requests 78.4% of the time.

The Future of Generics in Part D

Starting January 1, 2025, drug manufacturers will be required to give extra discounts on certain drugs during both the initial coverage and catastrophic phases. This is called the Manufacturer Discount Program. It’s designed to push even more people toward generics. The Congressional Budget Office predicts this will bump generic use from 87.3% to 91.5% by 2027.

Also, new rules require every therapeutic category to have at least one generic drug available without prior authorization. That means fewer roadblocks for common meds like statins, metformin, or levothyroxine.

The long-term goal? Keep Part D financially stable. The Medicare Trustees Project that if generic use continues rising at its current rate (1.2 percentage points per year), the program’s trust fund will stay solvent through 2093. That’s not just good policy-it’s essential.

Final Thought: Generics Are the Backbone

Medicare Part D doesn’t work because of fancy technology or big marketing campaigns. It works because it makes sense economically. Generics are cheaper. They’re safe. They’re effective. And the system is built to reward their use.

But the system only works if you use it right. Know your tiers. Check your plan every year. Ask questions. If you’re paying more than you should, it’s not because the system failed. It’s because you didn’t check.

The truth? You don’t need to pay full price for your meds. You just need to know where to look.