Medicaid Generic Drug Policies: How States Are Cutting Prescription Costs

When it comes to controlling healthcare spending, few levers are as powerful as generic drugs. In Medicaid, generics make up 85% of all prescriptions but only 16% of drug spending. That’s not an accident. It’s the result of deliberate, aggressive strategies by states trying to stretch limited budgets without cutting access to essential medicines.

How Medicaid’s Generic Drug System Works

The foundation of all state efforts is the Medicaid Drug Rebate Program (MDRP), created by federal law in 1990. Under this program, drug manufacturers must pay rebates to states in exchange for having their drugs covered by Medicaid. For generic drugs, the rebate is calculated as either 13% of the Average Manufacturer Price (AMP) or the difference between AMP and the "best price" the manufacturer offers other buyers - whichever is higher.

This system gives states a guaranteed discount, but it’s not flexible. Unlike brand-name drugs, where states can negotiate extra rebates on top of the federal minimum, generic rebates are locked in by federal formula. That means states can’t just haggle for better prices. They have to get creative.

Maximum Allowable Cost Lists: The Most Common Tool

Forty-two states use Maximum Allowable Cost (MAC) lists to cap how much they pay for generic drugs. These lists set a price ceiling for each generic drug based on wholesale prices, average acquisition costs, or other benchmarks. If a pharmacy tries to bill Medicaid for more than the MAC amount, the state pays only the capped amount.

It sounds simple - and it works. MAC lists saved states billions over the last decade. But they’re not perfect. In 2024, 68% of states updated their MAC lists monthly or less often. That’s a problem when generic prices swing wildly. A drug might drop to $2 per pill one month, but if the MAC list hasn’t been updated, the pharmacy gets paid $5. The next month, the price spikes to $8, and suddenly the pharmacy loses money because the MAC hasn’t caught up. Pharmacies, especially small independent ones, report delays in payments and claim denials because of these mismatches.

Mandatory Generic Substitution and Therapeutic Interchange

Forty-nine states require pharmacists to substitute a generic version when it’s available - even if the doctor didn’t specify it. This is called mandatory generic substitution. It’s one of the most effective cost-control tools because it automatically shifts prescriptions away from expensive brand-name drugs.

Thirty-seven states go further with therapeutic interchange. This means Medicaid can switch a patient from one generic drug to another within the same class - not because the original drug is unavailable, but because the new one is cheaper. For example, if two different generic blood pressure pills work the same way, Medicaid might push the patient to the one that costs $3 instead of $8. This isn’t about clinical effectiveness. It’s about economics.

These policies are backed by preferred drug lists (PDLs). Twenty-eight states use PDLs to steer prescribers toward the most cost-effective options. If a doctor wants to prescribe a drug not on the list, they often need prior authorization - adding a paperwork hurdle that discourages unnecessary spending.

Targeting Price Gouging on Generic Drugs

Here’s where things get controversial. Some states aren’t just managing prices - they’re trying to stop them from exploding.

In 2020, Maryland passed a law that makes it illegal for manufacturers to raise prices on generic drugs without a valid reason - like new clinical data or increased production costs. If a drug’s price jumps 50% in a year with no justification, the state can investigate and penalize the company. Other states, like California and Colorado, followed suit.

This targets a real problem. In recent years, some generic drugs - especially older ones with few manufacturers - have seen wild price spikes. One insulin generic jumped from $10 to $200 per vial in five years. A heart medication went from $20 to $500. These weren’t supply chain issues. They were profit plays.

But critics argue these laws backfire. The Pharmaceutical Care Management Association says price controls scare manufacturers out of the generic market. If a drug becomes unprofitable, they stop making it - and then there’s a shortage.

The PBM Problem

Medicaid doesn’t pay pharmacies directly in most states. It contracts with Pharmacy Benefit Managers (PBMs) like OptumRx, Magellan, and Conduent to handle drug payments. These middlemen negotiate discounts, manage formularies, and collect rebates. But they also take a cut - sometimes hiding how much they’re really making.

Twenty-seven states have passed new rules since 2024 requiring PBMs to disclose their actual acquisition costs for generic drugs. Before, many PBMs would bill Medicaid for a drug at $10, say they got it for $8, and pocket the $2 difference as a "spread." Now, states can see what the pharmacy really paid and pay accordingly.

This is a quiet revolution. In states like Texas and New York, this transparency has already cut generic drug spending by 8-12% in just two years.

Supply Chain Shortages and Strategic Stockpiling

In 2023, 23 states reported shortages of critical generic drugs - like antibiotics, IV fluids, or seizure medications. The average shortage lasted nearly five months.

Instead of just waiting for the market to fix itself, 12 states passed laws in 2024 to build emergency stockpiles. Oregon and Washington started a multi-state purchasing pool to buy 47 high-volume generics in bulk, locking in lower prices and ensuring supply. Texas created a carve-out for gene therapies, but also set up a reserve for essential generics.

The goal isn’t just to avoid shortages. It’s to prevent price spikes during emergencies. When a drug is scarce, manufacturers raise prices. States are trying to break that cycle before it starts.

What’s Next: GLP-1s, Legal Battles, and Federal Shifts

The biggest new threat to Medicaid budgets isn’t a generic drug - it’s a brand-name one. GLP-1 medications like Ozempic and Wegovy cost around $12,000 per year. Thirteen states already cover them for obesity treatment, but only with strict rules. If a federal rule forces Medicaid to cover them without restrictions, it could add $1.2 billion in annual costs.

Meanwhile, the Congressional Budget Office predicts 15 more states will introduce generic drug pricing laws in 2025. But pharmaceutical companies are fighting back. They’ve sued over 20 state laws already, arguing they violate federal law or interstate commerce rules. So far, courts have been split.

The federal government is stepping back. In March 2025, CMS dropped its own drug pricing model, putting the entire burden on states. That means Medicaid agencies are now on the front lines of drug cost control - with no backup.

Are These Policies Working?

The data says yes - but with caveats.

States that use MAC lists, mandatory substitution, and PBM transparency have seen generic drug spending drop 5-8% annually. That’s billions saved. But every state also reports trade-offs: delayed pharmacy payments, fewer manufacturers willing to supply certain drugs, and occasional shortages.

The key is balance. The most successful states - like Minnesota and Maryland - combine price caps with supply safeguards. They don’t just lower prices. They make sure the drugs are still available.

The future of Medicaid isn’t about choosing between affordability and access. It’s about designing systems that deliver both.