Medicaid Generic Drug Policies: How States Are Cutting Prescription Costs

When it comes to controlling healthcare spending, few tools are as powerful as generic drugs. In Medicaid, they make up 84.7% of all prescriptions but only 15.9% of total drug spending. That’s the math states are betting on to keep their budgets from collapsing under the weight of rising drug prices. But here’s the catch: just because generics are cheap doesn’t mean they’re always affordable. Some manufacturers have raised prices on old, off-patent drugs by 500%, 1,000%, even more-sometimes with no new clinical data to justify it. And when that happens, states don’t just sit back. They fight back.

How Medicaid’s Rebate System Actually Works

The foundation of every state’s generic drug strategy starts with the Medicaid Drug Rebate Program (MDRP) a federal program requiring drug manufacturers to pay rebates to states in exchange for including their drugs in Medicaid formularies. Created in 1990, MDRP isn’t optional-it’s mandatory. For generic drugs, manufacturers must pay a rebate of at least 13% of the Average Manufacturer Price (AMP), or the difference between AMP and the "best price" they offer other buyers, whichever is higher. That’s it. No negotiation. No flexibility. Unlike brand-name drugs, where states can demand extra rebates, generics are locked into this formula.

That’s why states can’t rely on MDRP alone. If they want to squeeze out more savings, they have to build their own systems on top of it. That’s where Maximum Allowable Cost (MAC) lists come in.

Maximum Allowable Cost Lists: The Real Workhorse of Cost Control

Forty-two states now use Maximum Allowable Cost (MAC) a state-set cap on how much Medicaid will reimburse pharmacies for a generic drug lists. Think of it like a price ceiling. If a pharmacy buys a generic pill for $0.10, but the state’s MAC is set at $0.15, the pharmacy gets paid $0.15. But if the pharmacy paid $0.25 for it? Too bad. The state won’t cover more than $0.15. The pharmacy eats the difference.

That’s how states keep prices in check. But here’s the problem: MAC lists aren’t updated fast enough. A 2024 survey found that 68% of states update their MAC lists monthly or less often. Meanwhile, generic drug prices can swing wildly-sometimes dropping overnight after a new manufacturer enters the market. When that happens, pharmacies get stuck. They’re paid less than what they paid for the drug. Some pharmacies have stopped stocking certain generics altogether because they can’t afford the losses.

Independent pharmacies reported that 74% have faced delayed payments or claim rejections due to MAC list mismatches. That’s not just a billing glitch-it’s a barrier to care. If a patient needs a generic blood pressure pill, but their pharmacy won’t stock it because the state’s reimbursement is too low, the patient goes without.

State Laws That Target Price Gouging

Some states went further than MAC lists. They passed laws that make it illegal to jack up prices on old generics without a good reason.

Take Maryland. In 2020, it became the first state to pass a law specifically targeting unjustified price hikes on generic and off-patent drugs. If a drug’s price increases by more than 50% in a year-and there’s no new clinical evidence to support it-the state can investigate and fine the manufacturer. Other states followed. California, Connecticut, and Vermont now have similar laws. The National Academy for State Health Policy (NASHP) a nonpartisan organization that helps states design health policy calls this a "model policy," and it’s gaining traction.

These laws don’t stop all price hikes, but they’ve created a deterrent. Manufacturers now think twice before raising prices on drugs like metformin, levothyroxine, or albuterol-medications millions of Medicaid patients rely on. The threat of a state investigation can be enough to keep prices stable.

Therapeutic Interchange and Preferred Drug Lists

States also use Preferred Drug Lists (PDLs) a curated list of drugs that Medicaid will cover with fewer restrictions to steer patients toward cheaper, equally effective options. For example, if there are three different statins to lower cholesterol, the state might only require prior authorization for the most expensive one. The other two? Approved automatically. That’s therapeutic interchange: swapping one drug for another with the same effect but a lower price tag.

Twenty-eight states use PDLs with therapeutic interchange policies. It’s not about limiting choice-it’s about guiding it. A patient on a high-cost generic might get switched to a lower-cost version with the same active ingredient. Studies show patients don’t experience worse outcomes. In fact, adherence often improves because the co-pay is lower.

The PBM Problem: Who’s Really Getting Paid?

Here’s where things get murky. Most states don’t pay pharmacies directly. They hire Pharmacy Benefit Managers (PBMs) third-party companies that negotiate drug prices and process claims for Medicaid like OptumRx, Magellan, or Conduent to handle pharmacy benefits. These PBMs claim to save money by negotiating discounts. But here’s the twist: they often keep a cut of those discounts as "spread pricing."

For example: a pharmacy buys a generic drug for $0.10. The PBM tells Medicaid it cost $0.50. Medicaid pays $0.50. The pharmacy gets $0.10. The PBM pockets $0.40. That’s spread pricing. And it’s legal-until now.

Twenty-seven states have passed new PBM transparency rules in 2024. Nineteen of them now require PBMs to disclose the actual price they paid for generic drugs. That’s a game-changer. When states can see what PBMs are really paying, they can cut out the middleman’s profit. Some states are even starting to pay pharmacies directly, bypassing PBMs entirely.

Supply Chain Risks and Stockpiling

The biggest threat to generic drug access isn’t price-it’s shortage. In 2023, 23 states reported shortages of critical generic medications. Some lasted over 140 days. Why? Because generic drug manufacturing is concentrated. Three companies now control 65% of the generic injectables market. If one factory has a quality issue, the whole country feels it.

Twelve states introduced legislation in 2024 to build strategic stockpiles of high-risk generics. Oregon and Texas are testing new risk pools. New Hampshire is creating a state-backed inventory of essential drugs. The goal? Prevent another crisis like the 2018 shortage of injectable epinephrine or the 2021 shortage of hydrocortisone.

The Bigger Picture: What’s Next?

The Congressional Budget Office estimates that state-level policies could reduce generic drug spending by 5-8% annually. That’s billions of dollars saved. But there’s a warning: if states push too hard, manufacturers might stop making certain drugs altogether. If a generic isn’t profitable, why produce it? The result? Shortages. And then Medicaid ends up paying more for brand-name alternatives.

That’s why the smartest states are balancing cost control with access. They’re using MAC lists, anti-gouging laws, PBM transparency, and stockpiling-not as weapons, but as tools. They’re also starting to collaborate. Oregon and Washington now run a multi-state purchasing pool that negotiates supplemental rebates for 47 high-volume generics. Other states are joining.

And the federal government? It’s stepping back. In March 2025, CMS dropped its "Two Dollar Drug List" model, leaving states to lead the way. That means state policies will shape the future of generic drug pricing in America.

What’s Coming in 2025 and Beyond

Look ahead: 15 more states are expected to introduce generic drug pricing legislation in 2025. GLP-1 medications for obesity-like semaglutide-are already costing $12,000 a year. Medicaid programs are starting to cover them, but only with strict prior authorization. If federal rules force broader coverage, that could add $1.2 billion to state budgets in a single year.

Meanwhile, the Medicaid and CHIP Payment and Access Commission (MACPAC) an independent agency that advises Congress on Medicaid and CHIP is pushing for changes to the MDRP rebate formula for generics during drug shortages. Right now, manufacturers pay the same rebate whether a drug is in short supply or not. MACPAC argues that during shortages, the rebate should increase to incentivize production. That’s a radical idea-and it might be the next big policy shift.

One thing is clear: states aren’t waiting for Washington to act. They’re building their own systems-layer by layer, law by law. And for the millions of low-income Americans who rely on Medicaid for their prescriptions, that’s not just policy. It’s survival.

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