Medicaid spends billions on prescription drugs every year - but most of that money isn’t going to brand-name pills. 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. And states are using every tool they can to make sure that advantage keeps working.
How the Medicaid Drug Rebate Program Works
The federal Medicaid Drug Rebate Program (MDRP) is the backbone of generic drug pricing in Medicaid. Since 1990, drugmakers have been required to give states rebates in exchange for having their drugs covered. For generic drugs, the rebate is either 13% of the Average Manufacturer Price (AMP), or the difference between AMP and the best price offered to other buyers - whichever is higher. That’s it. No room for negotiation. That’s different from brand-name drugs, where states can sometimes strike supplemental deals for bigger discounts. With generics, the rebate is fixed by law. So states can’t just call a drug company and ask for a better deal. They’ve had to get creative.Maximum Allowable Cost Lists: The Most Common Tool
Forty-two states use something called a Maximum Allowable Cost (MAC) list. Think of it like a price cap. If a pharmacy tries to bill Medicaid for a generic drug at $15, but the state’s MAC limit is $10, the pharmacy only gets paid $10. The rest? On them. These lists aren’t static. Thirty-one states update them quarterly or more often. But here’s the catch: generic prices can swing fast. If a manufacturer drops the price of a common antibiotic from $12 to $6, but the state doesn’t update its MAC list for two months, pharmacies get stuck. They’re paying more than they’re getting reimbursed. That’s why 74% of independent pharmacies reported delayed payments or rejected claims in late 2024 due to outdated MAC lists.Mandatory Generic Substitution and Therapeutic Interchange
Forty-nine states require pharmacists to substitute a generic for a brand-name drug unless the doctor says no. That’s not new. But now, 28 states are going further with therapeutic interchange policies. That means if a patient is on a more expensive generic version of a drug, the state can switch them to a cheaper one - even if it’s not the exact same chemical - as long as it works the same way. For example, if a patient is on Brand X generic for high blood pressure that costs $8, but there’s a different generic version that works just as well and costs $3, the state can push the switch. This isn’t about cutting corners. It’s about using clinically equivalent options to save money without hurting outcomes.
Price Gouging Laws and Generic Drug Shortages
In 2020, Maryland passed a law making it illegal for drugmakers to jack up prices on generic drugs without new clinical data. Since then, at least six other states have followed suit. These laws target companies that buy up old, off-patent drugs and then raise prices 500%, 1,000%, or even 5,000% overnight. But here’s the tension: when states crack down on price hikes, some manufacturers just stop making those drugs altogether. In 2023, 23 states reported shortages of critical generic medications - antibiotics, insulin, seizure meds - with an average shortage lasting 147 days. The FDA says three companies now control 65% of the generic injectable market. That kind of consolidation means fewer players to step in when one exits.Pharmacy Benefit Managers: The Hidden Middlemen
Thirty-three states hire companies like OptumRx, Magellan, or Conduent to manage their pharmacy benefits. These Pharmacy Benefit Managers (PBMs) negotiate with drugmakers, set reimbursement rates, and handle claims. But they’re not always transparent. In 2024, 27 states passed new rules requiring PBMs to disclose how much they actually pay for generic drugs. Before, many PBMs kept their acquisition costs secret, making it impossible for states to know if they were getting a fair deal. Now, states are starting to see that PBMs sometimes pocket the difference between what they pay pharmacies and what Medicaid pays them. That’s called the spread pricing loophole - and states are closing it.
State Coalitions and Bulk Buying
No state can fight drug prices alone. That’s why Oregon and Washington started a multi-state purchasing pool. They joined forces with nine other states to buy 47 high-volume generic drugs together. By pooling demand, they got supplemental rebates on top of the federal ones. That’s how they saved $18 million in one year on just 12 common generics. Other states are watching. In 2025, 15 more are expected to join similar coalitions. It’s not magic - but it’s one of the few ways states can push back against the market power of big drugmakers.What’s Next? Supply Chains and GLP-1 Drugs
The biggest shift coming isn’t about price - it’s about supply. Twenty-two states are planning to stockpile critical generic drugs by 2026. Think of it like a strategic reserve for medicine. If a factory in India shuts down or a raw material gets blocked, states won’t be left scrambling. Meanwhile, GLP-1 drugs - the new wave of weight-loss medications like Ozempic and Wegovy - are starting to show up in Medicaid. The average annual cost? $12,000. Thirteen states already cover them, but only with strict prior authorization. If a new federal rule forces all Medicaid programs to cover these drugs for obesity, it could add $1.2 billion a year to state budgets. That’s why states are watching closely - and preparing to tighten restrictions.The Big Trade-Off: Savings vs. Access
The Congressional Budget Office estimates state policies could cut generic drug spending by 5-8% annually. That’s billions saved. But they also warn: if states go too far, manufacturers will quit making low-margin generics. That could force patients onto more expensive alternatives - and actually raise Medicaid costs by 2.3%. States are walking a tightrope. They need to keep drugs affordable for millions of low-income people. But they also need to make sure those drugs are actually available. The best policies don’t just cut prices - they protect supply, demand transparency, and reward manufacturers who keep making the essentials.Why don’t states just negotiate lower prices for generic drugs like they do for brand-name drugs?
Because federal law sets a fixed rebate formula for generics - either 13% of the Average Manufacturer Price or the difference between that and the best price, whichever is higher. Unlike brand-name drugs, states can’t negotiate supplemental rebates for generics. That means they can’t call a manufacturer and ask for a better deal. Their power comes from other tools, like price caps and bulk buying.
What’s a Maximum Allowable Cost (MAC) list and how does it save money?
A MAC list is a state-set price cap for generic drugs. If a pharmacy tries to bill Medicaid for more than the MAC limit, they only get paid the capped amount. This prevents overcharging and keeps drug costs predictable. For example, if a generic antibiotic costs $12 at the pharmacy but the MAC is $8, Medicaid pays $8. The pharmacy absorbs the rest - which pushes them to buy cheaper generics.
Do generic drug price controls cause shortages?
Yes, sometimes. When states set price caps too low or punish manufacturers for price increases too aggressively, some companies stop making low-profit generics because they can’t cover production costs. That’s why 23 states had shortages of critical generic drugs in 2023. The key is balance - saving money without driving manufacturers out of the market.
How do Pharmacy Benefit Managers (PBMs) affect generic drug prices in Medicaid?
PBMs act as middlemen between states, pharmacies, and drugmakers. They negotiate prices and handle claims, but many used to hide how much they actually paid for drugs - keeping the difference as profit. This practice, called spread pricing, inflated costs. Now, 27 states require PBMs to disclose their acquisition costs, which helps states ensure they’re not overpaying.
Are states working together to lower generic drug prices?
Yes. Oregon and Washington started a multi-state purchasing pool that now includes 11 states. Together, they buy 47 high-volume generic drugs in bulk and get supplemental rebates on top of federal ones. That’s how they saved $18 million in one year. More states are joining because individual states don’t have enough buying power to compete with big drugmakers alone.
Roshan Aryal
January 4, 2026 AT 19:02