How States Use Medicaid Generic Drug Policies to Cut Prescription Costs

Medicaid spends billions each year on prescription drugs, but the majority of that spending doesn’t come from brand-name pills. It comes from generics - the same medicine, at a fraction of the price. In 2023, generic drugs made up 84.7% of all Medicaid prescriptions, yet they accounted for just 15.9% of total drug spending. That’s the power of generics. But even with these savings, states are under pressure. Drug prices still spike unexpectedly. Shortages of essential medications are growing. And manufacturers sometimes raise prices on old, off-patent drugs with no new research to justify it. So how are states fighting back? They’re not waiting for federal action. They’re building their own systems - and some are working better than others.

How the Federal System Already Helps - and Where It Falls Short

The foundation of Medicaid drug pricing is the Medicaid Drug Rebate Program (MDRP), created in 1990. Under this program, drug makers must pay rebates to states in exchange for having their drugs covered by Medicaid. For brand-name drugs, rebates are based on a complex formula tied to price increases and the best price offered to other buyers. But for generics? The rebate is simpler: 13% of the Average Manufacturer Price (AMP), or the difference between AMP and the best price, whichever is higher. That’s it.

This sounds fair, but here’s the catch: states can’t negotiate extra rebates for generics like they can for brand-name drugs. That means when a generic drug suddenly jumps in price - say, from $5 to $50 a pill - the federal rebate doesn’t change. The state still gets 13% of that new, inflated price. That’s not a discount. It’s a tax on the patient and the state budget.

Some states have tried to fix this by asking manufacturers to pay more - but federal rules block them. So instead, they’ve turned to other tools. And they’re getting creative.

Maximum Allowable Cost Lists: The Most Common Tool

Forty-two states now use Maximum Allowable Cost (MAC) lists to cap what 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 $12, but the MAC list says the maximum allowed is $8, the state only pays $8. The pharmacy eats the difference - or finds a cheaper supplier.

MAC lists aren’t magic. They’re updated manually, often monthly or quarterly. That creates problems. When a drug’s price drops suddenly - say, because a new manufacturer enters the market - the MAC list might not reflect it for weeks. Pharmacies get stuck. Patients wait. And sometimes, the pharmacy can’t even get the drug at the MAC price, so they don’t fill the prescription at all.

A 2024 survey found that 68% of states update their MAC lists less than once a month. Meanwhile, 74% of independent pharmacies reported delayed payments or denied claims because the MAC price didn’t match what they actually paid. That’s not cost control. That’s administrative chaos.

Mandatory Generic Substitution: Making the Easy Choice

Forty-nine states require pharmacists to substitute a generic drug when it’s available - unless the doctor says no. This isn’t new. But it’s powerful. It removes the burden from the patient. You don’t have to ask. You don’t have to argue. The pharmacy just gives you the generic. And because generics are cheaper, the state saves money without changing a single rule.

Some states go further. They create preferred drug lists - a curated list of generics that are proven to work just as well as more expensive options. If a doctor prescribes a non-preferred drug, the pharmacy has to get prior approval. That slows down the process, but it also cuts unnecessary spending. Twenty-eight states use this method, and many tie it to therapeutic interchange - meaning pharmacists can swap one generic for another if they’re clinically equivalent.

Cracking Down on Price Gouging

Here’s the most controversial move: some states are making it illegal to jack up prices on old generic drugs with no new clinical value. Maryland passed a law in 2020 that lets the state investigate and penalize manufacturers who raise prices on generics without justification. Other states, like California and Colorado, followed with similar laws.

It sounds simple: don’t exploit a monopoly on a 30-year-old pill. But drug makers fight back. They argue these laws interfere with free markets. Yet when a drug like doxycycline - used for infections for over 60 years - jumps from $20 to $1,800 a bottle, it’s hard to call that a market. It’s price gouging.

States that have passed these laws have seen fewer wild price spikes. But enforcement is tricky. It takes time, staff, and legal resources. Only a handful of states have the capacity to investigate claims thoroughly.

Controlling the Middlemen: Pharmacy Benefit Managers

Most states don’t pay pharmacies directly. They hire Pharmacy Benefit Managers (PBMs) like OptumRx or Magellan to handle claims, negotiate prices, and manage networks. But PBMs don’t always pass savings on. They keep a cut. Sometimes, they even profit from price increases.

That’s why 27 states introduced new PBM transparency rules in 2024. Nineteen of them now require PBMs to report exactly how much they paid for each generic drug - not just what they billed Medicaid. This is a game-changer. If a PBM buys a pill for $1.50 and bills Medicaid $10, the state can demand a refund. Or drop the PBM. And some have.

States like New York and Oregon are now using this data to renegotiate contracts. They’re also exploring direct payment models - cutting PBMs out entirely for high-volume generics. It’s risky. But the savings could be huge.

Stockpiling Generics: Preparing for the Next Shortage

In 2023, 23 states reported shortages of critical generic drugs. Some lasted over 140 days. Drugs like injectable epinephrine, insulin, and antibiotics disappeared. Hospitals scrambled. Patients went without.

Twelve states introduced new laws in 2024 to build emergency stockpiles of essential generics. Oregon and Washington launched a multi-state purchasing pool to buy 47 high-volume generics together - giving them more bargaining power. Texas is stockpiling antibiotics. Maryland is securing alternative suppliers for heart medications.

This isn’t just about saving money. It’s about saving lives. And it’s becoming a top priority. By 2026, the National Academy for State Health Policy predicts 22 states will have formal stockpiling programs for generics.

What Doesn’t Work - And Why

Not every strategy pays off. Some states tried to cap reimbursement at a fixed dollar amount - like $2 per pill - regardless of market price. That led to pharmacies refusing to fill prescriptions. Others tried to ban certain generics outright. That created access problems for patients with allergies or sensitivities.

The biggest mistake? Ignoring supply chains. You can’t control price if you don’t control who makes the drug. Three companies now control 65% of the generic injectable market. If one factory shuts down - due to FDA violations, natural disaster, or financial trouble - dozens of drugs vanish overnight. States that focus only on price, and not on manufacturing diversity, are setting themselves up for failure.

The Future: More States, More Pressure

The number of states with at least one drug affordability policy jumped from 12 in 2020 to 34 in 2024. The Congressional Budget Office predicts 15 more will pass generic pricing laws in 2025. But legal challenges are growing. Drug makers are suing states over price caps, arguing they violate federal law.

Still, the trend is clear. States are tired of waiting. They’re using every tool they have: MAC lists, PBM transparency, stockpiling, anti-gouging laws, and therapeutic interchange. They’re not perfect. But they’re real. And they’re working.

The goal isn’t to eliminate all drug spending. It’s to stop paying for fraud, greed, and inefficiency. Generics are the most powerful weapon in that fight. And states are finally learning how to use it.