Medicaid Generic Drug Policies: How States Are Cutting Prescription Costs

Generic drugs make up 84.7% of all Medicaid prescriptions, but they only account for 15.9% of total drug spending. That’s not a mistake. It’s the reason states are betting big on generics to keep Medicaid budgets from collapsing. While brand-name drugs grab headlines with their $10,000-a-year price tags, it’s the quiet, everyday generics-like metformin, lisinopril, or levothyroxine-that keep millions of low-income patients alive. And when those cheap drugs suddenly spike in price, states don’t wait. They act.

How Medicaid Gets Its Generic Drug Discounts

The federal Medicaid Drug Rebate Program (MDRP), created in 1990, is the backbone of how states pay less for generics. Manufacturers must give Medicaid a rebate for every pill sold. For generic drugs, that rebate is either 13% of the average manufacturer price-or the difference between that price and the best price they offer anyone else, whichever is higher. It sounds simple, but it’s not flexible. Unlike brand-name drugs, where states can negotiate extra rebates on top of the federal minimum, generics are locked into this formula. That means if a manufacturer hikes the price of a generic antibiotic, Medicaid’s rebate goes up too-but not enough to fully offset the cost.

That’s why 42 states now use something called a Maximum Allowable Cost (MAC) list. Think of it like a price ceiling. If a pharmacy tries to bill Medicaid for a generic drug at $15, but the state’s MAC list says the max they’ll pay is $8, the pharmacy gets $8. It’s not about what the drug costs the pharmacy-it’s about what the state says it’s worth. States update these lists monthly or quarterly, but delays are common. When prices drop faster than the list updates, patients can’t get the cheaper version. When prices spike, the MAC might still be too low, and pharmacies refuse to fill the prescription.

States Are Fighting Back Against Price Gouging

Some generic drug makers don’t just raise prices-they exploit shortages. In 2019, a single manufacturer raised the price of a life-saving generic seizure medication from $25 to $1,800 per bottle. That’s not market competition. That’s price gouging. Maryland was the first state to pass a law in 2020 that makes it illegal to jack up prices on off-patent drugs without a valid reason-like new clinical data or manufacturing costs. Since then, at least six other states have followed, including California and Colorado. These laws don’t ban price increases. They require manufacturers to prove the increase is fair. If they can’t, the state can force them to lower the price or face fines.

It’s not just about individual drugs. States are now looking at the whole supply chain. Three companies control 65% of the generic injectable market. That kind of consolidation means fewer competitors, less pressure to keep prices low, and more risk when one factory shuts down. In 2023, 23 states reported shortages of critical generic drugs-some lasting over 147 days. To fight this, 12 states passed laws in 2024 to build emergency stockpiles of essential generics. Oregon and Washington teamed up to create a multi-state buying pool, negotiating bulk discounts on 47 high-volume generics. That’s not just smart-it’s necessary.

Pharmacy Benefit Managers Are the Hidden Wild Card

Most states don’t pay pharmacies directly. They hire Pharmacy Benefit Managers (PBMs)-companies like OptumRx or Magellan-to handle drug claims, negotiate prices, and manage formularies. The problem? PBMs keep their profit margins secret. They collect rebates from drug makers, charge pharmacies a fee, and pocket the difference. In some cases, a pharmacy pays $2 for a generic drug, the PBM bills Medicaid $10, and the PBM keeps $6 as profit. That’s why 27 states passed new PBM transparency rules in 2024. Nineteen of them now require PBMs to report what they actually paid for each generic drug. If a state finds out a PBM is overcharging, they can cut ties or demand refunds.

Independent pharmacies are feeling the squeeze. A 2024 survey of 1,200 small pharmacies found that 74% had claims denied or delayed because the state’s MAC list didn’t match what the PBM was charging. Some pharmacies had to pay out of pocket just to fill prescriptions. That’s not sustainable. States are starting to realize: if you want to control drug costs, you have to fix the middlemen too.

Therapeutic Interchange and Preferred Drug Lists

States aren’t just capping prices-they’re guiding doctors and patients toward cheaper, equally effective options. Nearly 30 states use Preferred Drug Lists (PDLs). These are lists of generics that Medicaid will cover without extra paperwork. If a doctor wants to prescribe a more expensive generic that’s not on the list, they have to submit a prior authorization form. It’s not a ban-it’s a nudge. For example, if two generics treat high blood pressure equally well, but one costs $3 and the other costs $12, Medicaid will cover the $3 version automatically. That’s therapeutic interchange in action.

Some states go further. In Texas and Oregon, they stopped restricting access to expensive hepatitis C drugs after prices dropped. Why? Because the generics became affordable. That’s the goal: make the cheap option the default, and the expensive one the exception.

The Pushback from Drug Makers

It’s no surprise that drug makers don’t love these moves. The Pharmaceutical Care Management Association (PCMA), which represents PBMs, argues that state price controls could reduce generic drug availability. They say if manufacturers can’t make a profit on a drug, they’ll stop making it. The Congressional Budget Office agrees-partly. Their 2024 report estimated that aggressive state policies could cut generic spending by 5-8% annually, but warned that if prices drop too low, manufacturers might exit the market. That could lead to shortages, forcing states to pay even more for alternatives.

Stanford’s Dr. Mark Duggan has a different take. He says the real risk isn’t lower prices-it’s outdated rules. He recommends expanding rebate requirements during drug shortages. Right now, when a generic runs out, manufacturers can raise prices without penalty. Duggan argues that if Medicaid tied rebates to supply stability, companies would have a financial reason to keep producing these drugs-even when profits are slim.

What’s Coming Next

In 2025, expect more states to target generics directly. Fifteen new states are expected to introduce legislation to cap prices or require transparency. The federal government is stepping back-CMS canceled its own drug pricing model in March 2025, putting the focus squarely on states. Meanwhile, the rising cost of GLP-1 drugs like Ozempic and Wegovy is putting pressure on Medicaid budgets. Thirteen states already cover these for obesity, but with prior authorization. If the federal government mandates coverage, Medicaid could face an extra $1.2 billion in annual costs.

By 2026, 22 states plan to have strategic stockpiles of critical generics. That’s a long-term fix for shortages. States are also experimenting with value-based purchasing-paying more for generics that lead to fewer hospital visits or better outcomes. It’s a shift from paying per pill to paying for results.

Medicaid’s future doesn’t depend on finding new miracle drugs. It depends on keeping the old ones affordable. The tools are there: MAC lists, rebate reforms, PBM transparency, stockpiles, and therapeutic interchange. The challenge? Doing it fast enough to keep up with price spikes, without triggering shortages. States aren’t just trying to save money. They’re trying to save lives-by making sure the cheapest drugs are always in stock.