How Medicare Part D pays for generics

In 2024, Medicare Part D covered about 3.1 billion prescriptions, counted in 30-day supplies. Nine in ten were generics. Yet generics accounted for $36.1 billion of the program's $288.9 billion in gross spending, or 12.5 percent, according to the July 2026 data book¹ from the Medicare Payment Advisory Commission (MedPAC), the agency that advises Congress on Medicare payment.

That split, broken down further in our look at the generic share of Part D, is one reason Part D policy debates tend to center on brand-name drugs. It also hides a lot of machinery. A generic fill passes through a plan bid submitted the June before the plan year began, a pharmacy contract written by the plan or its pharmacy benefit manager, a reimbursement list that must be updated weekly, and a benefit structure Congress rewrote for 2025. For the benefit changes themselves, see our guide to Medicare Part D changes in 2025 and 2026.

Plan bids set the starting price

Part D is run by private plans. MedPAC describes² them as insurers that accept risk and provide pharmacy benefit management services, negotiating with pharmacies over payment for prescriptions and with manufacturers over rebates on brand-name drugs. Each year, under 42 CFR 423.265⁴, every would-be sponsor must submit a bid “not later than the first Monday in June” for each plan it intends to offer the following calendar year. The bid is the sponsor's estimate of its average monthly revenue requirement to provide the coverage.

CMS then averages those bids. For 2027, the agency said on July 28, 2026³, the national average monthly bid amount is $296.05. CMS uses that figure to calculate the government subsidy to plans, and the base beneficiary premium, the starting point for each plan's basic premium, will be $41.33. The Inflation Reduction Act caps growth in the base premium at 6 percent a year from 2024 through 2029. CMS also said it would end the Part D Premium Stabilization Demonstration for stand-alone plans after 2026.

Generic prices feed into those bids directly, because plans carry most of the cost of generics themselves. In 2024, plans at risk paid 49 percent of gross generic spending, compared with 18 percent for brand-name drugs and 16 percent for biologics, MedPAC found¹. Brand-name spending leans much more on Medicare reinsurance and manufacturer rebates.

Source: MedPAC Data Book, Chart 10-24¹. Rows do not include retroactive pharmacy fees, which were about −1 percent for generics and 1 percent or less for the other groups. Enrollees pay a larger share of generic costs than of brand costs in part because brand-name drugs and biologics are more often filled in the catastrophic phase, where, since 2024, enrollees pay no cost sharing.

How the pharmacy gets paid

At the counter, the plan pays the pharmacy a negotiated price. Federal rules at 42 CFR 423.100⁵ define it as the price the plan and the network pharmacy “have negotiated as the lowest possible reimbursement such network entity will receive, in total,” including all pharmacy price concessions and any dispensing fees. That definition took effect for 2024. Before then, many pharmacy fees were collected after the sale, as part of what CMS calls direct and indirect remuneration (DIR).

That change hit generics hardest. In 2023, MedPAC reported¹, pharmacy fees equaled 12 percent of gross spending on generics, against 7 percent for brand-name drugs. After the rule, retroactive pharmacy fees fell to just under 1 percent of all gross spending, and on net, plans paid pharmacies about $2.2 billion in postsale adjustments. Total DIR fell from $92 billion in 2023 to about $79 billion in 2024.

Federal rules treat cost-based pricing references in pharmacy contracts, including the maximum allowable cost lists widely used for generics, as a “prescription drug pricing standard.” Under 42 CFR 423.505(b)(21)⁶, sponsors must update such a standard on Jan. 1 and “not less frequently than once every 7 days thereafter,” and must disclose the prices to pharmacies in advance if the source is not public. Plans must also pay clean electronic claims from network pharmacies, other than mail-order and long-term care pharmacies, within 14 days of receipt, according to the prompt-payment rule⁷. Our explainers on how pharmacies get paid and MAC, NADAC and other benchmarks go deeper.

What the drug itself costs

For older generics, the ingredient is often the smallest part of the claim. Part D plans do not publish their negotiated rates, but the federal NADAC survey⁹ shows what retail pharmacies pay to buy common generics. GxRadar's analysis of CMS NADAC files for October 2026 puts the 30-tablet ingredient cost for five widely used drugs at under $1.25 each. These are Medicaid benchmarks, not Part D prices.

Prices like these are why Part D's generic price index keeps falling. Measured against the start of 2015, MedPAC found¹ that prices for Part D generics had fallen to 29 percent of their earlier level by the end of 2024, with an unusually sharp drop between 2023 and 2024 that it tied to the pharmacy-fee rule. Over the same period prices for single-source brand-name drugs rose 63 percent. The longer history is in the long deflation of generic prices and on our price tracker.

What enrollees pay for a generic

The Inflation Reduction Act's redesign, in effect since 2025, changed who pays above the deductible. MedPAC notes in its January 2026 status report² that for generics, plans pay 75 percent of covered costs between the deductible and the out-of-pocket cap, with the enrollee paying 25 percent under the standard design. Above the cap, Medicare pays 40 percent of generic costs and plans 60 percent; for brand-name drugs the split is 20 percent manufacturer, 20 percent Medicare and 60 percent plan, per the data book¹. In 2026 the standard deductible is $615 and the out-of-pocket cap is $2,100.

For generics, actual plan designs look different from the standard 25 percent. In 2026, nearly all Part D enrollees were in plans with a five-tier structure that includes two generic tiers, MedPAC reported¹. The median copay was $0 for a generic on the lowest tier and $3 to $10 for other generics. Enrollees with the low-income subsidy (see Medicare Extra Help explained) and incomes between 100 and 150 percent of the poverty line paid at most $5.10 for a generic or preferred multisource drug in 2026, up from $4.90 in 2025. When a plan's copay exceeds the price of the drug, a cash purchase can cost less, a situation covered in when the cash price beats the copay.

Next year's parameters are already set. CMS's CY 2027 Rate Announcement⁸ raises the standard deductible to $700 and the out-of-pocket cap to $2,400. The maximum low-income subsidy copay for a generic rises to $5.80 for enrollees between 100 and 150 percent of the poverty line, and to $1.65 for full-benefit dual eligibles at or below 100 percent.