Most people think pharmacies make big money on prescription drugs. But if you ask an independent pharmacist in Ohio or a small-town pharmacy owner in rural Washington, they’ll tell you a different story. They’re not getting rich off pills. In fact, many are barely breaking even - and the reason has everything to do with generic drugs.

Generics Are the Real Profit Engine - Even Though They Cost Less

Here’s the twist: generic drugs make up 90% of all prescriptions filled in the U.S. But they only account for about 25% of total drug spending. Why? Because brand-name drugs cost 10 to 100 times more. A $500 insulin pen or a $1,200 cancer pill drives the numbers. But here’s what no one talks about: pharmacies make most of their actual profit from the $5 generic antibiotics or $10 blood pressure pills.

According to the Schaeffer Center’s 2022 analysis, pharmacies earn an average gross margin of 42.7% on generic drugs. That’s more than 12 times the margin they make on brand-name drugs, which hover around 3.5%. So even though brand drugs bring in more total revenue, the bulk of pharmacy profits come from low-cost generics.

Think of it this way: for every $100 spent on a generic drug, the pharmacy keeps about $32 before paying rent, staff, and utilities. For a brand drug, they might only keep $3. That’s why pharmacies rely on volume. They fill hundreds of generic prescriptions a day just to stay afloat.

The Hidden Game: How PBMs Control What Pharmacies Actually Get Paid

But here’s the catch - that $32 isn’t what ends up in the pharmacy’s bank account. It’s what’s listed on the receipt. What the pharmacy actually gets paid? That’s controlled by pharmacy benefit managers, or PBMs.

Three companies - CVS Caremark, Express Scripts, and OptumRx - control 80% of the market. They negotiate prices between drug manufacturers and insurers. But they don’t tell pharmacies what they’re being paid. Instead, they use something called “spread pricing.”

Here’s how it works: A PBM tells your insurance plan, “This generic drug costs $12.” Then they tell the pharmacy, “We’ll reimburse you $8.” The PBM pockets the $4 difference. That’s spread pricing. And it’s legal.

On top of that, PBMs sometimes do “clawbacks.” If you dispense a generic and the patient pays $10 at the counter, but the PBM later decides the drug’s true cost is $12, they demand you pay back $2. That’s right - you’ve already given the patient the pills, and now you owe money.

Independent pharmacies report losing 8-10% net profit on generics five years ago. Now, it’s down to 2% or less. Meanwhile, rent, wages, and insurance premiums keep rising. One Ohio pharmacy owner told Pharmacy Times, “My overhead went up 35%. My profit didn’t.”

Why Generic Prices Are Rising - Even When Competition Should Lower Them

You’d think more generic manufacturers would mean lower prices. And that’s usually true. The FDA says when three or more companies make the same generic, prices drop by about 20% within three years.

But that’s not happening anymore. Between 2014 and 2016, nearly 100 generic drug makers merged or were bought out. Now, the top five companies control 45% of the market - up from 32% in 2015.

Result? Some generics have only one manufacturer left. No competition. No price pressure. And in some cases, the price of the generic is now higher than the brand-name version.

SureCost’s 2024 white paper found cases where a single-source generic for a common antibiotic cost more than the brand. Why? Because the manufacturer has no rivals. And PBMs have no leverage to push the price down.

That’s why pharmacists are seeing more patients walk out because they can’t afford the $40 generic that’s now more expensive than the $30 brand. It’s not just bad economics - it’s bad medicine.

Mail-Order Pharmacies Are Winning - And Retail Pharmacies Are Losing

While your local pharmacy struggles, mail-order pharmacies are thriving. Why? Because they’re not bound by the same rules.

3Axis Advisors found that mail-order pharmacies make over four times the margin on generics compared to grocery store pharmacies. For brand drugs? They make more than 35 times the margin.

And in some cases, when pricing is opaque - like with specialty drugs or those without clear list prices - mail-order pharmacies can make up to 1,000 times more profit on a generic than a small retail pharmacy. How? They buy in bulk, negotiate directly with PBMs, and don’t have the overhead of storefronts.

That’s why independent pharmacies are closing. Between 2018 and 2023, over 3,000 closed. The National Community Pharmacists Association says 68% of independent owners rank declining generic reimbursement as their top threat.

Meanwhile, big chains like Walgreens and CVS are buying up independents. They’re also building their own PBMs. That’s not charity - it’s survival.

What Pharmacies Are Doing to Survive

Some pharmacies are fighting back. Not by hoping for better reimbursement, but by changing their business model.

• Many now offer Medication Therapy Management (MTM) services - one-on-one consultations with patients about their drugs. Medicare pays for this. It’s not about pills anymore - it’s about advice.
• Some have become specialty pharmacies, handling complex drugs for conditions like MS or rheumatoid arthritis. These drugs come with higher reimbursements and fewer clawbacks.
• A growing number are going cash-only for generics. Mark Cuban’s Cost Plus Drug Company charges $20 for a generic plus a $3 dispensing fee. Amazon Pharmacy does something similar: $5 for common generics, with full cost breakdowns.
• Others are cutting ties with PBMs entirely and contracting directly with employers or unions. One pharmacy in Minnesota reported a 4% net margin increase after switching.

The NCPA’s Rebuttal Academy has trained over 8,500 pharmacy staff to challenge unfair PBM payments. It’s not easy. It takes 15-20 hours a week just to fight for fair reimbursement.

What’s Next? Regulation, Disruption, and the Future of Pharmacy

The government is starting to pay attention. The FTC has launched investigations into PBM practices. States like California, Texas, and Illinois passed laws in 2022-2023 requiring PBMs to disclose how they set reimbursement rates.

The Inflation Reduction Act, which starts drug price negotiations for Medicare in 2026, could indirectly help. If brand-name drug prices drop, PBMs might have less room to inflate spreads.

But the real change might come from outside the system. Companies like Cost Plus Drug Company and Amazon Pharmacy are proving that transparent pricing works. Patients like knowing exactly what they’re paying. Pharmacies that adopt this model report higher customer loyalty and less pressure from PBMs.

Will independent pharmacies survive? Goldman Sachs predicts 20-25% more closures by 2027 unless reimbursement rules change. But Leerink Partners says pharmacies that shift to services - not just pills - can hit 4-6% net margins.

The truth? Pharmacy economics isn’t broken. It’s working exactly as designed - for PBMs and big chains. For the local pharmacist? It’s a daily battle to stay open. And the only way out is to stop playing the old game - and build a new one.