Medicaid Generic Drug Policies: How States Are Cutting Prescription Costs

When it comes to controlling prescription drug spending, Medicaid generic drugs are the quiet heroes of state health budgets. Even though they make up 84.7% of all Medicaid prescriptions, they only account for 15.9% of total drug spending. That’s not an accident. States have spent years building systems to make sure these low-cost medications stay affordable - without cutting off access for the millions who rely on them.

How Medicaid Gets Its Generic Drug Discounts

The foundation of all this cost control is the Medicaid Drug Rebate Program (MDRP), created by federal law in 1990. Under this program, drug manufacturers must give states rebates on every generic drug sold to Medicaid. For generics, that rebate is at least 13% of the average manufacturer price - or the difference between that price and the best price the company offers anywhere else, whichever is higher. It’s a simple formula, but it works. Without MDRP, Medicaid would be paying far more for everyday medications like metformin, lisinopril, or amoxicillin.

States don’t get to negotiate extra rebates on generics like they can with brand-name drugs. That’s a big limitation. But they’ve found other ways to squeeze out savings without breaking federal rules.

Maximum Allowable Cost Lists: The Most Common Tool

Forty-two states use Maximum Allowable Cost (MAC) lists to cap how much they’ll pay for a generic drug. Think of it like a price ceiling. If a pharmacy tries to bill Medicaid for a generic pill at $5, but the state’s MAC is $3.25, the state only pays $3.25. The pharmacy eats the rest - or finds a cheaper supplier.

These lists aren’t static. Thirty-one states update them quarterly or more often, adjusting for price drops in the open market. But here’s the catch: 68% of states update MAC lists monthly or less. That means if a generic drug suddenly drops to $2.50, but the state’s list still says $3.50, pharmacies get paid too much - and taxpayers foot the bill. Worse, if the price spikes and the MAC isn’t updated fast enough, pharmacies might refuse to fill the prescription because they’d lose money.

Independent pharmacies report this is a real problem. A survey of 1,200 community pharmacies in late 2024 found that 74% had seen claims denied or payments delayed because their state’s MAC list didn’t match what they paid for the drug. That’s not just a billing glitch - it’s a barrier to care.

Forcing Generic Substitution

Forty-nine states require pharmacists to substitute a generic version whenever it’s available and approved by the doctor. That’s not just policy - it’s law. If a prescription says "Lisinopril," and a generic version exists, the pharmacist must give the generic unless the doctor specifically writes "dispense as written." This isn’t just about savings. It’s about consistency. Patients get the same medication, just at a fraction of the cost. And because generics are bioequivalent to brand-name drugs, there’s no clinical downside. This policy alone saves states billions each year.

Therapeutic Interchange and Preferred Drug Lists

Twenty-eight states go further. They create Preferred Drug Lists (PDLs) - essentially, a curated list of generics that Medicaid will cover without extra paperwork. If a doctor wants to prescribe a non-preferred generic, they often need prior authorization. That’s not a ban - it’s a nudge.

Some states even use therapeutic interchange. That means if a patient is on a more expensive generic, the pharmacist can switch them to a cheaper one in the same drug class - say, switching from one brand of metformin to another - without calling the doctor. This works because the drugs are medically equivalent, but the price difference can be huge.

Going After Price Gouging

Some states aren’t waiting for market forces. They’re passing laws to stop manufacturers from jacking up prices on old, off-patent drugs.

Maryland’s 2020 law is one of the first and most aggressive. It allows the state to fine drugmakers if they raise prices on generic drugs without new clinical evidence - like suddenly doubling the cost of a 60-year-old antibiotic. Other states, including California and Colorado, have followed suit. These laws don’t target every price increase - just the ones that look like exploitation.

Critics say this interferes with free markets. But states argue that when a drug has no competition - say, one company controls 90% of the supply - then it’s not a market anymore. It’s a monopoly.

Managing the Supply Chain

Here’s the dirty secret: even with all these savings tools, generic drugs are still in short supply.

In 2023, 23 states reported shortages of critical generic medications. The average shortage lasted nearly five months. Why? Because many generics are made overseas, and production can be disrupted by everything from natural disasters to factory inspections. Three companies now control 65% of the generic injectable market - meaning if one factory shuts down, dozens of drugs vanish.

Twelve states introduced new laws in 2024 to fix this. Some are stockpiling essential generics. Others are creating backup suppliers or partnering with other states to buy in bulk. Oregon and Washington lead a multi-state purchasing pool that negotiates supplemental rebates on 47 high-volume generics - something no single state could do alone.

Who’s Really Controlling the Prices?

Here’s a twist: most states don’t buy drugs directly. They hire Pharmacy Benefit Managers (PBMs) like OptumRx or Magellan to handle prescriptions. PBMs are middlemen. They negotiate with manufacturers, set reimbursement rates, and process claims. But they don’t always pass savings along.

In 2024, 27 states passed new rules requiring PBMs to disclose what they actually pay for generic drugs. Nineteen of them now require transparency on acquisition costs. Why? Because some PBMs were keeping the difference between what they paid and what they reimbursed pharmacies - a practice called spread pricing.

When states started cracking down, pharmacy owners cheered. Patients noticed fewer denials. But PBMs pushed back hard, arguing these rules hurt their ability to negotiate discounts.

The Big Trade-Off: Savings vs. Access

Every cost-saving strategy has a flip side. MAC lists that are too low can lead to drug shortages. Price caps that are too tight can make manufacturers quit the market. A 2024 Congressional Budget Office report warned that overly aggressive state pricing could reduce generic availability - and push patients toward more expensive brand-name drugs or hospital visits.

The goal isn’t to slash prices at all costs. It’s to keep the system balanced. Medicaid needs to pay enough so manufacturers don’t abandon the market, but not so much that it drains state budgets.

That’s why experts like Dr. Mark Duggan from Stanford say reforming the MDRP rebate formula for generics could unlock billions in savings - especially during drug shortages. If manufacturers had to pay higher rebates when supply is tight, they’d have more incentive to keep producing.

What’s Next?

By 2026, 22 states plan to have strategic stockpiles of critical generics. Fifteen more are expected to introduce legislation targeting generic pricing in 2025. The federal government is stepping back - CMS canceled its own drug pricing model in March 2025, leaving states as the main drivers of change.

The rise of GLP-1 drugs like Ozempic and Wegovy is adding pressure. These are brand-name drugs, but they’re being prescribed for obesity - a condition many Medicaid patients have. Thirteen states already cover them, but only with strict prior authorizations. If federal rules force all Medicaid programs to cover them, states could face an extra $1.2 billion in annual costs.

That’s why the focus on generics is only getting stronger. They’re the foundation. When they work, the whole system works.