How Second and Third Generic Drugs Drive Down Prescription Prices

When a brand-name drug loses its patent, the first generic version usually hits the market at about 87% of the original price. That sounds like a big discount-until you realize what happens next. When a second generic enters, prices plunge to around 58% of the brand’s cost. Add a third generic, and you’re looking at just 42%. That’s not a trend. That’s a system designed to save lives by cutting costs.

Why the Second Generic Changes Everything

The first generic isn’t the hero. It’s the opener. It breaks the brand’s monopoly, but it doesn’t always trigger a price war. Many times, that first generic maker has little incentive to slash prices further. Why? Because they’re the only game in town. No competition means they can hold prices steady-or even raise them slightly over time.

Enter the second generic. Suddenly, there are two companies selling the exact same medicine. They’re chemically identical. They’re FDA-approved. The only real difference? Price. That’s when the real battle starts. One company lowers its price to win shelf space. The other responds. Wholesalers and pharmacies start favoring the cheaper option. Within months, the average price drops by more than a third from the first generic’s level.

This isn’t theory. It’s data. The FDA tracked 2,400 generic drugs approved between 2018 and 2020. Their analysis showed that the jump from one to two generic manufacturers reduced prices by 36%. That’s $100 off a $300 drug. For a patient paying out of pocket, that’s a month’s supply suddenly becoming affordable.

The Third Generic Is Where the Real Savings Kick In

Most people think the first generic is the big win. But the biggest savings come from the third entrant. That’s when the market flips from a duopoly to a true auction. Three manufacturers are now fighting for the same business. Each one knows that if they don’t undercut the others, they’ll lose contracts with big pharmacy chains and PBMs (pharmacy benefit managers) who control most of the prescription flow.

The numbers don’t lie. With three generics, prices fall to 42% of the original brand price. That’s a 58% drop from the first generic’s price. For a drug that used to cost $500 a month, it’s now $210. For chronic conditions like high blood pressure or diabetes, that’s the difference between taking your meds or skipping doses.

A 2021 analysis by the Assistant Secretary for Planning and Evaluation (ASPE) found that markets with three or more generic competitors saw price reductions of about 20% within three years-just from having that third player in the game. And when you get to five or more manufacturers, prices often fall 70-80% below the brand’s original cost.

What Happens When There’s No Third Generic?

Here’s the dark side: nearly half of all generic drug markets never get past two manufacturers. That’s not by accident. Sometimes, it’s because manufacturing is too complex or too cheap to bother with. Other times, it’s because big players buy up smaller ones. Teva swallowed Allergan’s generic division. Viatris was born from the merger of Mylan and Upjohn. Fewer companies mean less competition.

When only two companies are selling a drug, prices don’t just stall-they can spike. A 2017 University of Florida study found that when a market went from three generics down to two, prices jumped 100% to 300% in some cases. That’s not a glitch. That’s market failure. One company raises prices. The other follows. No one has to win the race anymore. They just have to agree not to undercut each other.

That’s why the number of competitors matters more than the number of brands. It’s not about having options. It’s about having enough options to force real price pressure.

Who’s Really in Control?

You’d think more generics means lower prices for patients. But the system is rigged in other ways. The real power doesn’t lie with manufacturers. It lies with three giant wholesalers-McKesson, AmerisourceBergen, and Cardinal Health-who control 85% of the market. And three PBMs-Express Scripts, CVS Health, and Optum-handle 80% of prescriptions.

These middlemen negotiate bulk discounts. But they don’t always pass the savings to you. They take a cut. And if there are only two generic makers, they can play them against each other and still pay more than they should. Only when there are five or more manufacturers do PBMs have real leverage to drive prices down.

Even worse, brand-name companies sometimes pay generic makers to stay off the market. These “pay-for-delay” deals cost patients $3 billion a year in extra out-of-pocket costs, according to the Blue Cross Blue Shield Association. A 2002 drug with 75 patents stretched its monopoly from 2016 to 2034. That’s not innovation. That’s legal obstruction.

Why This Matters for Real People

Imagine you’re on a medication that costs $400 a month. You’re on Medicare. Your copay is $30. But if a third generic enters and the price drops to $170, your copay might drop to $15-or even $10, depending on your plan. That’s $240 a year saved. For someone living on a fixed income, that’s groceries, gas, or heating.

The FDA estimates that the 2,400 generics approved between 2018 and 2020 saved consumers $265 billion. That’s not a number on a chart. That’s millions of people who didn’t have to choose between medicine and rent.

The same goes for chronic conditions. A diabetic on insulin? A heart patient on statins? A cancer survivor on maintenance drugs? These aren’t luxury medications. They’re life-sustaining. And without multiple generic competitors, many of them would still cost hundreds of dollars a month.

What’s Being Done to Fix This?

There are signs of progress. The CREATES Act, passed in 2022, stops brand companies from blocking generic makers from getting samples they need to prove their drug works. That’s a big deal-some brands were hoarding samples to delay competition.

The FDA’s GDUFA III program (2023-2027) is speeding up approvals for complex generics, which used to take years to enter the market. These are drugs like inhalers or injectables that are harder to copy. More competition there means more savings where they’re needed most.

Bipartisan bills like the Preserve Access to Affordable Generics and Biosimilars Act aim to ban pay-for-delay deals outright. If passed, they could save $45 billion over ten years.

But the simplest fix? Encourage more manufacturers to enter the market. The more competitors, the faster prices fall. The FDA’s own data proves it: every additional generic lowers prices. There’s no magic formula. Just more players.

What You Can Do

You can’t control who makes the drugs. But you can control what you ask for. When your pharmacist gives you a generic, ask: “Is there another version available?” If they say no, ask why. If your insurance only covers one generic, call them. Ask if they can switch to a cheaper one.

Talk to your doctor. Ask if there’s a generic version with more competition. If your drug has only one or two makers, you’re not getting the full benefit of the system. There’s a better option out there-if you know to look for it.

What’s Next?

The trend is clear: more generics = lower prices. But the system is under pressure. Consolidation among manufacturers and middlemen threatens to reverse progress. Without policy changes, the savings from second and third generics could shrink. The Congressional Budget Office warns that without action, Medicare could lose $25 billion a year by 2030 to inflated generic prices.

The good news? The mechanism works. We’ve seen it. We’ve measured it. We’ve saved billions because of it. The question isn’t whether additional generic competition lowers prices. It’s whether we’ll let the system keep working-or let it be choked by greed and consolidation.