Introduction
In 2021, Medicaid generic drugs accounted for 84.7% of all prescriptions but only 15.9% of Medicaid’s drug spending. This shows how critical generics are for keeping costs down. States aren’t just relying on federal rules-they’re creating their own strategies to control drug prices while making sure patients get needed medicines. Let’s see how they’re doing it and what challenges they face.
How the Federal Rebate System Works
The Medicaid Drug Rebate Program (MDRP) started in 1990 and requires drug makers to pay rebates for Medicaid coverage. For generics, manufacturers pay 13% of the Average Manufacturer Price (AMP) or the difference between AMP and the best price, whichever is higher. While this gives a baseline discount, states can’t negotiate extra rebates for generics like they can for brand-name drugs. Avalere Health’s 2025 analysis shows this limits states’ ability to lower generic drug costs further.
Key State Strategies for Cost Control
States use several practical methods to manage generic drug expenses:
- Maximum Allowable Cost (MAC) lists: 42 states set payment limits for generics using MAC lists. Thirty-one states update these lists quarterly or more often. California updates its MAC list monthly, saving $120 million in 2023 by matching payments to current prices.
- Therapeutic substitution: Twenty-eight states use preferred drug lists that let pharmacists switch to cheaper generics when safe. Texas reduced hypertension drug costs by 20% through this approach.
- Prescription Drug Affordability Boards (PDABs): Nine states, including California and Maryland, created PDABs to review drug prices. Maryland’s 2020 law penalizes manufacturers for unjustified generic price hikes without new clinical data.
- Value-based purchasing: Nineteen states tie payments to patient outcomes for select generics. New Hampshire’s new risk pool for high-cost medications is an example of this.
Challenges States Face in Cost Control
Despite these efforts, states hit roadblocks. In 2023, 23 states had shortages of critical generic drugs, with shortages lasting an average of 147 days. MAC lists often lag behind price changes-68% of states update them monthly or less, causing pharmacies to lose money when prices drop. A 2024 survey of 1,200 independent pharmacies found 74% faced payment delays due to MAC list mismatches. Pharmacy Benefit Managers (PBMs) also create issues. Twenty-seven states added new PBM transparency rules in 2024, including 19 requiring PBMs to disclose actual generic drug acquisition costs.
Recent Trends and Future Outlook
States are adapting quickly. Oregon and Washington lead a multi-state purchasing pool for 47 high-volume generics, negotiating better prices together. The Congressional Budget Office estimates state drug policies could save $3.8 billion annually by 2027. However, Avalere Health warns aggressive price controls might make manufacturers stop producing certain generics, worsening shortages. FDA data shows three companies now control 65% of the generic injectables market, making supply chains fragile. To address this, 22 states plan strategic stockpiling programs for critical generics by 2026. CMS shifted focus to state-level initiatives after canceling the Medicare Two Dollar Drug List Model in March 2025.
Frequently Asked Questions
How do Maximum Allowable Cost (MAC) lists help control Medicaid drug costs?
MAC lists set the highest amount Medicaid will pay for a generic drug. States like California update these lists monthly to match current market prices. This prevents overpaying when drug prices drop and ensures pharmacies get fair reimbursement. However, if MAC lists aren’t updated often enough, pharmacies may lose money when prices fall below the MAC threshold, causing access issues for patients.
What role do Pharmacy Benefit Managers (PBMs) play in Medicaid generic drug costs?
PBMs handle pharmacy benefits for Medicaid programs, negotiating drug prices with manufacturers and pharmacies. But their opaque pricing practices have raised concerns. States like New York and Illinois now require PBMs to disclose actual acquisition costs for generics. This transparency has reduced claim rejections by 30% in 2024, ensuring Medicaid funds are used efficiently.
Why are drug shortages a problem for Medicaid programs?
Shortages disrupt patient care and force Medicaid to pay higher prices for alternatives. In 2023, 23 states faced shortages averaging 147 days per drug. When critical generics like antibiotics or heart medications become unavailable, treatment delays occur. States like Texas and Oregon are now building strategic stockpiles to prevent future disruptions.
How do states address price gouging on generic drugs?
Maryland passed the first law in 2020 targeting unjustified generic price hikes without new clinical data. The law allows penalties for manufacturers who raise prices excessively. California and Colorado later adopted similar policies through their Prescription Drug Affordability Boards (PDABs). These boards review drug pricing and set upper payment limits based on value and affordability.
What’s the future of state Medicaid generic drug policies?
The Congressional Budget Office predicts state drug pricing policies could save $3.8 billion annually by 2027. However, experts warn overly aggressive policies might reduce generic drug availability, leading to higher costs from substituting expensive brand-name drugs. States are increasingly focusing on supply chain resilience. Multi-state purchasing pools, like Oregon and Washington’s collaboration for 47 high-volume generics, will likely expand to negotiate better prices and prevent shortages.