Medicaid spends billions on prescription drugs every year, but here’s the surprising part: generic drugs make up 85% of all Medicaid prescriptions, yet only 16% of the total drug spending. That’s because generics cost far less than brand-name drugs. States know this, and they’re using every tool they can to make sure those savings stick. From price caps to supply chain fixes, Medicaid programs across the country are getting smarter about how they pay for the most common medicines people rely on.
How Medicaid Gets Discounts on Generic Drugs
The federal government doesn’t just leave states to figure out drug prices on their own. Since 1990, the Medicaid Drug Rebate Program (MDRP) has forced drug makers to give states a discount just to get their drugs covered. For generic drugs, that discount is at least 13% of the average price manufacturers charge. It’s not much compared to the rebates for brand-name drugs, but with millions of prescriptions filled every year, those pennies add up.
States can’t negotiate extra discounts on generics like they can with brand-name drugs. That’s a big limitation. But they’ve found other ways to squeeze out savings. One of the most common tools is the Maximum Allowable Cost (MAC) list. Forty-two states use these lists to set a cap on how much they’ll pay for each generic drug. If a pharmacy tries to bill more than the MAC price, Medicaid won’t cover the difference. In 31 states, these lists are updated every quarter - or even more often - to keep up with falling prices.
Forcing Generic Substitution
Even when a doctor prescribes a brand-name drug, 49 states require pharmacists to swap it out for the generic version - unless the doctor says no. This isn’t just a cost-saving move; it’s a standard practice. Patients often don’t even notice the switch because generics have the same active ingredients, same dosage, same effectiveness. The only difference? Price. A 30-day supply of a generic blood pressure pill might cost $4. A brand-name version could be $150.
Some states go further. Thirty-seven states limit which drugs can be prescribed within a therapeutic class. For example, if there are five generic drugs for treating high cholesterol, Medicaid might only cover the cheapest one unless the doctor proves the patient needs a more expensive option. This isn’t about denying care - it’s about making sure the best value gets used first.
Stopping Price Gouging on Generic Drugs
Here’s the problem: sometimes, generic drug prices don’t stay low. A drug that’s been on the market for 20 years can suddenly spike in price - not because it’s better, but because there’s less competition. One company buys up the manufacturing rights, cuts supply, and jacks up the cost. In 2018, a generic antibiotic used for pneumonia jumped from $20 to $1,800 per pill in just two years.
States like Maryland passed laws in 2020 to stop this. If a generic drug’s price increases by more than 50% in a year - and there’s no new clinical data to justify it - the manufacturer can be fined. Other states are following suit. The National Academy for State Health Policy calls this a model policy, and it’s one of the few tools that directly targets bad actors in the generic drug market.
Who’s Really Controlling the Prices?
It’s not just states and drug makers. Behind the scenes, Pharmacy Benefit Managers (PBMs) are the middlemen who negotiate prices between pharmacies and Medicaid. They’re supposed to bring down costs, but many states suspect they’re keeping the savings for themselves.
Twenty-seven states have started requiring PBMs to disclose how much they actually pay for generic drugs. Nineteen states now demand transparency on acquisition costs - the real price the PBM pays the wholesaler. If a PBM charges Medicaid $10 for a pill they bought for $2, that’s a problem. States are cracking down, but enforcement is still patchy.
Thirty-three states outsource their pharmacy benefits to PBMs like OptumRx, Magellan, or Conduent. That means the state’s budget depends on how well these private companies manage the system. And when MAC lists don’t match up with what pharmacies are paid, claims get rejected. A 2024 survey found that 74% of independent pharmacies have had payments delayed or denied because of mismatched pricing rules. That’s not just a billing issue - it’s a barrier to care.
Supply Chain Risks and Shortages
There’s another quiet crisis: shortages. In 2023, 23 states reported shortages of critical generic drugs - things like insulin, antibiotics, and heart medications. The average shortage lasted almost five months. Why? Because generic drug manufacturing is concentrated. Three companies now control 65% of the market for injectable generics. If one factory shuts down, supply vanishes.
Twelve states introduced new laws in 2024 to build up stockpiles of essential generics. Oregon and Washington started a multi-state buying group to negotiate bulk discounts on 47 high-volume generics. Texas created a carve-out for gene therapies, but also began stockpiling antibiotics. These aren’t emergency moves - they’re long-term strategies.
The Big Trade-Off: Savings vs. Access
States want to save money. Patients want their meds. But sometimes, the tools meant to save money hurt access. If a MAC list is updated too slowly, a drug might drop in price to $1, but Medicaid still pays $3 because the list hasn’t been refreshed. The pharmacy loses money and may stop carrying it. Patients can’t get it. That’s what happened in several states where pharmacies stopped stocking low-cost generics because the reimbursement was too low.
Experts warn that pushing too hard on price controls could backfire. The Pharmaceutical Care Management Association says aggressive state pricing rules might make manufacturers quit the generic market entirely. If that happens, shortages get worse, and Medicaid ends up paying even more for brand-name alternatives.
On the flip side, the Congressional Budget Office estimates that smart state policies could cut generic spending by 5-8% each year. That’s billions saved - enough to cover more patients or invest in other parts of the health system. The key is balance. Don’t punish low-cost manufacturers. Don’t ignore supply risks. And don’t let PBMs hide the real costs.
What’s Coming Next?
By 2025, 15 more states plan to introduce laws targeting generic drug pricing. Some want to tie Medicaid reimbursement to international prices. Others are looking at mandatory reporting of production costs. The federal government is stepping back - CMS announced in March 2025 it won’t launch its own drug pricing model, leaving states to lead.
Meanwhile, new high-cost drugs like GLP-1s for weight loss are starting to show up in Medicaid formularies. These drugs cost $12,000 a year. Thirteen states already cover them, but only with strict rules. If federal rules change and require all states to cover them, Medicaid budgets could spike by over a billion dollars.
The real test for states isn’t just controlling generic prices - it’s building a system that’s resilient, fair, and sustainable. That means updating MAC lists faster, holding PBMs accountable, stockpiling critical drugs, and punishing price gouging - all without pushing manufacturers out of the market.
Generic drugs are the backbone of Medicaid’s drug program. They’re not glamorous. They don’t make headlines. But they keep millions of people healthy and the system from collapsing. States that get this right won’t just save money - they’ll protect access.
How do Medicaid Maximum Allowable Cost (MAC) lists work?
MAC lists set the highest amount Medicaid will pay for a generic drug. If a pharmacy charges more than the MAC price, Medicaid only covers up to the limit - the pharmacy eats the rest. Forty-two states use MAC lists, and 31 update them quarterly to match falling prices. But if updates are too slow, pharmacies may stop stocking low-cost generics because they lose money, hurting patient access.
Why can’t states negotiate better rebates on generic drugs?
The federal Medicaid Drug Rebate Program sets fixed rebate formulas for generics - at least 13% of the average price. Unlike brand-name drugs, states can’t ask for extra discounts on generics. This limits their ability to drive down prices further, even when competition increases or production costs drop.
Which states are leading in generic drug cost control?
Maryland, Oregon, Texas, and California are among the leaders. Maryland banned unjustified price hikes on generics. Oregon and Washington created a multi-state purchasing pool for bulk discounts. Texas stockpiles critical generics and carved out high-cost therapies. California uses its purchasing power to pressure manufacturers and PBMs.
Do generic drug shortages affect Medicaid patients?
Yes. In 2023, 23 states reported shortages of essential generic drugs like insulin, antibiotics, and heart meds. The average shortage lasted 147 days. These gaps force patients to go without treatment or switch to more expensive brand-name drugs, increasing overall Medicaid spending.
Are Pharmacy Benefit Managers (PBMs) helping or hurting generic drug affordability?
It’s mixed. PBMs negotiate prices and manage claims, but many states suspect they’re hiding profits. Twenty-seven states now require PBMs to disclose how much they pay for generics. Nineteen states demand transparency on acquisition costs - the real price they pay suppliers. Without this, PBMs can charge Medicaid $10 for a pill they bought for $2, keeping the difference.
What’s the biggest risk of state price controls on generics?
The biggest risk is that manufacturers leave the market. If prices are capped too low or regulations are too strict, companies may stop making certain generics because they’re no longer profitable. That leads to shortages, forcing Medicaid to pay more for brand-name alternatives - which could raise overall drug spending by 2.3%, according to the Congressional Budget Office.
