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 Medicaid drug spending. That’s the math behind why states are doubling down on generic drug policies - not to cut access, but to stretch every dollar in a program that serves 80 million Americans. With Medicaid drug spending hitting $57.3 billion in 2023, states can’t afford to ignore the savings hiding in plain sight: the low-cost, high-volume generics that keep millions of low-income patients on their medications.

How Medicaid’s Federal Rebate System Works (And Why It’s Not Enough)

The foundation of Medicaid’s drug pricing system is the Medicaid Drug Rebate Program (MDRP), created in 1990. Under this federal rule, drug manufacturers must pay rebates to states in exchange for having their drugs covered by Medicaid. For brand-name drugs, rebates are tied to price increases and market share. But for generics? The rebate is a flat 13% of the Average Manufacturer Price (AMP) - or the difference between AMP and the manufacturer’s best price, whichever is higher.

That’s it. No room for negotiation. Unlike brand-name drugs, where states can strike supplemental rebate deals, generics are locked into this formula. That’s why states can’t rely on federal rules alone. They’ve had to build their own tools to control costs - and they’re getting creative.

Maximum Allowable Cost Lists: The Most Widely Used Tool

Forty-two states now use Maximum Allowable Cost (MAC) lists to cap what they’ll pay for generic drugs. Think of it like a price ceiling. If a pharmacy tries to bill Medicaid for a generic pill at $10, but the state’s MAC is $4, the state only pays $4. The rest? The pharmacy eats it - or finds a cheaper supplier.

MAC lists aren’t static. Thirty-one states update them quarterly or more often. But here’s the catch: many update them monthly or less. That creates a problem. When a generic drug’s price drops suddenly - say, because a new manufacturer enters the market - pharmacies can be stuck with claims that get rejected because the MAC hasn’t caught up. A 2024 survey found that 74% of independent pharmacies have had payments delayed or claims denied because of outdated MAC lists. It’s a system designed to save money, but it’s creating friction at the counter.

Mandatory Generic Substitution: The Silent Workhorse

Forty-nine states require pharmacists to substitute a generic version when a brand-name drug is prescribed - unless the doctor says no. This isn’t new. It’s been standard practice for years. But it’s still the most effective cost-control tool in the box. Why? Because it doesn’t require complex paperwork, prior authorizations, or appeals. It just works.

When a doctor writes a prescription for Lipitor, the pharmacist hands over atorvastatin. Same active ingredient. Same effect. One-tenth the price. And Medicaid pays less. No one has to ask for permission. No one has to wait. It’s automatic. And it’s why generic drugs dominate prescription volume - not because of aggressive marketing, but because the system pushes them to the front.

Therapeutic Interchange and Preferred Drug Lists

Some states go further. Twenty-eight states use preferred drug lists that encourage - or sometimes require - doctors to prescribe certain generics over others, even if they’re not the exact substitute. This is called therapeutic interchange. For example, if two generic blood pressure pills work equally well, the state might only cover the cheaper one. If the doctor wants the pricier version, they have to justify it.

It’s not about limiting options. It’s about steering toward the most cost-effective choice without sacrificing outcomes. A 2024 study by the Medicaid and CHIP Payment and Access Commission found that therapeutic interchange reduced spending on high-volume generics by 8-12% in states that used it aggressively - with no measurable drop in patient adherence or health outcomes.

Price Gouging Laws: Targeting Unfair Generic Drug Hikes

Here’s where things get controversial. In 2020, Maryland passed a law making it illegal for manufacturers to raise the price of generic drugs without a valid reason - like new clinical data or increased production costs. If a company hikes the price of a 50-year-old generic antibiotic from $5 to $50 overnight, the state can fine them.

Five other states - including California, Colorado, and Oregon - have followed suit. These laws target what’s called “price gouging”: sudden, unjustified spikes in generic drug prices. The FDA has documented dozens of cases where a single generic drug’s price jumped 1,000% after a competitor left the market. These laws are meant to stop that.

But the pharmaceutical industry fights back. The Pharmaceutical Care Management Association argues these laws disrupt the market and could lead to shortages. So far, courts have mostly let them stand - but legal challenges are mounting.

Pharmacy Benefit Managers: The Middlemen States Are Trying to Control

Thirty-three states outsource their pharmacy benefits to companies like OptumRx, Magellan, and Conduent. These Pharmacy Benefit Managers (PBMs) negotiate prices, set MAC lists, and process claims. But they also take a cut - sometimes as much as 20% of the drug’s price - without disclosing how much they actually pay the pharmacy.

That’s why 27 states passed new transparency rules in 2024. Nineteen now require PBMs to report the actual cost they pay for generics. This exposes hidden markups. In some cases, a pharmacy pays $1 for a pill, the PBM bills Medicaid $5, and keeps $3. Without transparency, states can’t fix that.

Supply Chain Risks: The Hidden Threat to Generic Availability

There’s a quiet crisis no one talks about enough: generic drug shortages. In 2023, 23 states reported shortages of critical generics - antibiotics, insulin, heart meds. The average shortage lasted 147 days. Why? Because manufacturing is concentrated. Three companies now make 65% of generic injectables. 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 Washington launched a multi-state purchasing pool to buy bulk quantities of 47 high-volume generics, locking in lower prices and ensuring backup supply. It’s not just about cost anymore. It’s about resilience.

What’s Next? The Big Shifts Coming in 2025

The federal government is stepping back. In March 2025, CMS announced it wouldn’t move forward with the Medicare Two Dollar Drug List Model. That means states are now the main front line in drug pricing.

Look ahead: 15 more states are expected to introduce legislation targeting generic drug prices in 2025. The focus? Tightening MAC lists, expanding price gouging laws, and forcing PBMs to disclose their true costs. The Congressional Budget Office estimates these efforts could save states $3.8 billion annually by 2027.

But there’s a warning: if states push too hard, manufacturers may quit making low-margin generics. That could trigger shortages. And when generics disappear, patients turn to brand-name drugs - costing Medicaid far more. It’s a tightrope walk: save money without losing access.

GLP-1 Drugs: The New Cost Challenge

While states focus on generics, a new threat is rising: GLP-1 medications like Ozempic and Wegovy. These drugs, used for diabetes and obesity, cost $12,000 a year. Thirteen state Medicaid programs cover them - but only with strict prior authorization. If federal rules change and require all Medicaid programs to cover these drugs without restrictions, KFF estimates an extra $1.2 billion in annual costs.

That’s why states are watching closely. If GLP-1s explode in use, they could eat up savings from generics. The real test? Can states keep controlling costs on the cheap drugs while managing the expensive ones?