Economics of the US Generics Market: Why the System Is Failing and How to Fix It

Generic medicines are the backbone of the American healthcare system. They account for nearly 90% of all prescriptions filled in 2024, yet represent only 12% of total drug spending, according to the Association for Accessible Medicines (AAM) annual savings report.¹ This imbalance, which reflects high volume and low expenditure, should ideally create a resilient and affordable drug ecosystem. Instead, the United States is confronting persistent drug shortages, resulting in delayed treatments, rising out‑of‑pocket burdens for patients, and worsening vulnerabilities for smaller hospitals, especially those in rural areas that are not a part of a broader IDN network and lack buying power.

Despite years of warnings, shortages have become a chronic structural problem. The American Society of Health-System Pharmacists (ASHP) reported 216 active shortages at the end of 2025. This is lower than the 2024 peak of 323, but still historically high, as most shortages last for years and require constant operational workarounds.² Meanwhile, Vizient estimates that U.S. hospitals now spend nearly $900 million annually in labor just to manage shortages, which is more than double the cost reported in 2019.³ These systemic stresses remain especially acute in oncology, anesthesia, and emergency medicine.

The human impact is direct and severe. When low‑cost injectables are unavailable, hospitals often substitute more expensive brand alternatives or rely on compounded supplies, which increases out‑of‑pocket spending, adds safety risks, and disproportionately burdens smaller or rural hospitals that lack preferential allocation during shortages. ASHP reports ongoing shortages of controlled substances, which continue to delay surgeries, complicate pain management, and strain pharmacy operations.⁴

Why Is the Generic Drug Market No Longer Functioning as Intended?

While generics generated $467 billion in savings in 2024, overall generic drug spending market continues to decline even as volume of pills sold increases.¹

“Race to the Bottom Pricing”

The generics industry in the US witnesses immense competition and is marked by deep price cuts, as the number of players eyeing the opportunity increase. As a rule of thumb, the entry of three competitors can slash prices by 30%, while markets with ten or more competitors often see prices plummet by 70% to 80%, relative to the pre-generic brand price. The cumulative effect of this massive shift to lower-priced alternatives has been significant for the American healthcare system. Savings have grown exponentially over time, creating a powerful deflationary force in an otherwise inflationary sector.⁵

The economics of generics have deteriorated to the point where sustainability is now at risk.⁵ AAM warns that the significant price deflation of the last 30 years has created conditions in which essential products are sold below sustainable cost levels and players are forced to leave the US market creating sustainability risk to the US Health system.

Poor Economics Translating to Fewer Launches

New analysis from the IQVIA Institute shows that 37% of FDA‑approved generics between 2013 and Q1 2024 never launched, and it often takes more than four years for 70% of approved generics to reach the market.⁶ Worse, for drugs currently in shortage, 84% have at least one approved generic that remains unlaunched, which highlights that economics rather than regulatory barriers are preventing supply from reaching patients.⁶

Manufacturers Moving to Complex Products

Lower priced drugs are hit the most as the economics of generics tumbles down. Nearly one-third of oral solid medicines in shortage are priced below $1 per unit, while 44% of injectables in shortage are priced below $5 per unit. Manufacturers have little or no incentive to continue where incentives are low and there is too much crowding.

Drug manufacturers are therefore moving to new drug modalities that are more complex to make and provide higher barriers to entry which brings stickiness to margins and increases the lifetime value of the drug making the market highly risk prone especially for products which have limited suppliers.⁷

Concentrated and Offshore Production

U.S. supply chains remain reliant on foreign sources for APIs and starting materials. USP estimates that, by volume, over half of U.S. prescription API comes from India and the EU, with China supplying a meaningful share of key starting materials; other analyses highlight the risks of geographic concentration and the need to understand actual volume exposure, not just facility counts. The implication is clear: onshoring finished dosage manufacturing alone will not fully derisk supply without attention to raw materials and precursors.

Geopolitical shocks, single‑source API dependence, and climate‑related disruptions have also exposed a brittle supply chain. The FDA acknowledges that quality failures and supply interruptions at a small number of facilities can drive nationwide shortages.⁸

How are PBM Practices Adding Pressure to the Generic Drug Market?

In addition to structural manufacturing challenges, PBM practices can inflate patient costs for generics. The Federal Trade Commission (FTC) 2025 interim report found that the “Big 3” PBMs—CVS Caremark, Express Scripts, and OptumRx—marked up specialty generic drugs by hundreds or thousands of percent, allowing them to generate more than $7.3 billion in excess revenue from 2017–2022.⁹ These markups, which often apply to cancer and chronic disease drugs, undermine the affordability promise of generics. PBMs have steered patients to affiliated pharmacies where markups are highest, and this has contributed to higher patient out‑of‑pocket spending.⁹

What Should the US Government Do?

The generic market needs new incentives that reward reliability rather than simply low prices. Several policy bodies, including the Senate Finance Committee and independent health economists, propose shifting policy from reactive mitigation to structural reinforcement of essential drug supply.

First, policymakers should introduce targeted pricing floors or stability payments for essential generics, especially sterile injectables. The Senate Finance Committee’s 2024 white paper recommends tying reimbursement to manufacturing quality and reliability.¹⁰ Small and planned increases in pricing could fund long‑overdue modernization in sterile facilities.

Second, the federal government should build strategic API reserves and offer guaranteed purchase contracts for high‑risk drugs, similar to national stockpile models used for vaccines or defense materials. CMS has also floated incentives for hospitals to maintain targeted buffer stock of essential medicines.¹¹ The government must reinforce investments for building domestic manufacturing capacity. Build incentives in building domestic capabilities in APIs and key starting materials and streamline regulatory hurdles for new U.S. manufacturing. We must secure the local supply chain and ensure that all critical and lifesaving medicines have a manufacturer with sufficient capacity build out of the US.

Third, regulators should create accelerated pathways for companies investing in modern aseptic technologies such as isolators, robotics, and automated visual inspection systems, while also providing tax credits or grants for facility upgrades. Given that quality failures cause many shortages, regulatory alignment around modernization is essential.

Fourth, PBM reform must continue. FTC findings suggest PBM markups directly worsen affordability for patients. Ending spread pricing, requiring net‑price‑based patient cost‑sharing, and ensuring fair reimbursement for independent pharmacies would better align incentives across the supply chain.

Fifth, secure the supply chain. The Drug Supply Chain Security Act’s final interoperability phase was enforced in 2025 to avoid supply disruption while achieving end‑to‑end electronic traceability. The goal is to reduce diversion and enable faster response to quality events without choking medicine flow which provides a delicate balance given ongoing shortage.

What Should Manufacturers Do?

Manufacturers also play a critical role in stabilizing the system. The starting point is a shift from “lowest‑cost” production to “most‑resilient” operations. Investments in redundancy, end‑to‑end digital quality systems, and multi‑source API strategies can reduce the risk of shutdowns.

Manufacturers should also accelerate the launch of approved generics, particularly for shortage‑afflicted injectables. IQVIA’s data shows smaller generic companies are more responsive in launching approved drugs during shortage windows, and this allows them to capture share while supporting patients.⁶

Finally, long‑term reliability‑weighted contracts with GPOs and health systems can establish predictable demand and support infrastructure investment. Although 503B outsourcing facilities provide short‑term relief, they are not a substitute for durable commercial manufacturing capacity, as outlined in recent Pharmaceutical Commerce analysis.¹²

What’s the Bottom Line?

The United States depends on generics for both affordability and access. Yet the system that supplies these critical medicines is economically unsustainable and operationally fragile. Fixing it requires shared responsibility: government action to align incentives, manufacturer investment in resilient capacity, and procurement reforms that reward reliability alongside price. Generics are not merely low‑cost commodities; they are a national public health asset, and their stability is essential to the functioning of American healthcare.

Rahul Mittal is the head of Strategy and Innovation at Dr. Reddy’s Laboratories.

References

1. Association for Accessible Medicines. U.S. Generic & Biosimilar Medicines Savings Report. 2025. https://accessiblemeds.org/resources/blog/2025-us-generic-biosimilar-medicines-savings-report
2. American Society of Health-System Pharmacists. National Drug Shortages: 2025 Year-End Report. 2025. https://www.ashp.org/drug-shortages
3. Vizient. Beyond the Shortage: Hidden Cost of Drug Disruptions. 2025. https://www.vizientinc.com/insights/market-trends/drug-shortages-hidden-costs
4. Becker’s Hospital Review. New drug shortages hit 20-year low but remain disruptive. 2026. https://www.beckershospitalreview.com/pharmacy/new-drug-shortages-hit-20-year-low-but-remain-disruptive.html
5. Pfizer. U.S. Drug Shortages: Sterile Injectables Policy Paper. 2024. https://www.pfizer.com/purpose/policy/healthcare-policy/drug-shortages-sterile-injectables
6. IQVIA Institute. Trends in Drug Shortages and ANDA Approvals in the U.S. 2025. https://www.iqvia.com/insights/the-iqvia-institute
7. United States Pharmacopeia. Long-lasting drug shortages drive average duration higher, disrupting patient care. Published May 7, 2025. https://www.usp.org/news/long-lasting-drug-shortages-drive-average-duration-higher-disrupting-patient-care
8. U.S. Food and Drug Administration. Drug Shortages Database and Status Reports. 2025. https://www.fda.gov/drugs/drug-safety-and-availability/drug-shortages
9. Federal Trade Commission. Interim Staff Report on PBM Specialty Generic Drug Pricing. 2025. https://www.ftc.gov/reports/interim-staff-report-pbm-specialty-generic-drug-pricing
10. United States Senate Finance Committee. Preventing and Mitigating Generic Drug Shortages. 2024. https://www.finance.senate.gov
11. McDermott+ Consulting. Breaking Down Federal Policies to Address Drug Shortages. 2024. https://www.mcdermottplus.com
12. Pharmaceutical Commerce. Have 503B outsourcing facilities truly reduced U.S. drug shortages? 2026. https://www.pharmaceuticalcommerce.com