Finnegan O'Sullivan
Feb 9
9
When you think about Medicaid spending, you might picture hospital stays or doctor visits. But one of the biggest drivers of costs isn’t fancy new treatments-it’s the generic drugs that millions of low-income Americans rely on every day. Even though generics make up over 84% of all Medicaid prescriptions, they still cost states billions. And as drug prices keep shifting, states are getting creative-sometimes controversial-to keep these essential medications affordable without cutting access.
Why Generic Drugs Still Cost So Much
It seems counterintuitive: generics are supposed to be cheap. After all, they’re copies of brand-name drugs that have lost patent protection. But in recent years, prices for some generics have spiked-sometimes by 500% or more-without any new research or improvement. Why? Because a handful of manufacturers control most of the market. Three companies now make two-thirds of all generic injectable drugs, according to FDA data. When one of them cuts production or raises prices, there’s little competition to push costs back down. This isn’t just about a few niche drugs. Critical medications like insulin, antibiotics, and blood pressure pills have all seen sudden price hikes. In 2023, 23 states reported shortages of essential generics, with some drugs unavailable for an average of 147 days. That’s not a glitch-it’s a systemic problem.The Federal Safety Net: Medicaid Drug Rebate Program
The federal government doesn’t leave states completely on their own. Since 1990, the Medicaid Drug Rebate Program (MDRP) has required drugmakers to pay rebates to states in exchange for having their drugs covered under Medicaid. For brand-name drugs, the rebate is steep-usually 23% or more of the price. But for generics? It’s only 13% of the Average Manufacturer Price (AMP), or the difference between AMP and the best price offered elsewhere, whichever is higher. That 13% sounds decent, but here’s the catch: it’s calculated on a formula, not negotiated. States can’t go back and ask for more. Unlike with brand drugs, where they can strike supplemental deals, generics are stuck with what the law gives them. So even though generics account for 84.7% of prescriptions, they only make up 15.9% of total Medicaid drug spending-meaning they’re doing their job, but the system isn’t doing enough to stop price spikes.State Strategies: What’s Actually Working
States aren’t waiting for Washington to fix this. Over the last five years, dozens have rolled out their own tools to control costs. Here’s what’s working:- Maximum Allowable Cost (MAC) Lists - 42 states now set a cap on how much they’ll pay for each generic drug. If a pharmacy charges more than that cap, the state won’t cover the full cost. This keeps prices in check. But here’s the problem: 68% of states update these lists monthly or less. If a drug’s price drops suddenly, patients might still be overcharged for weeks.
- Mandatory Generic Substitution - 49 states require pharmacists to substitute a generic version if it’s available and approved. This isn’t new, but it’s still one of the most effective ways to drive down spending.
- Preferred Drug Lists - 28 states use these to steer prescribers toward the lowest-cost options within a drug class. If two generics treat the same condition, the state will only pay full price for the cheaper one.
- Price Gouging Laws - Maryland was the first in 2020 to pass a law that penalizes manufacturers for unjustified price increases on generic drugs. Since then, other states like California and Colorado have followed. These laws don’t set price ceilings-they just require companies to prove their hikes are justified by production costs or clinical improvements.
- Supply Chain Stockpiling - Twelve states introduced legislation in 2024 to build emergency stockpiles of critical generics. Oregon and Texas, for example, are now storing extra supplies of antibiotics and heart medications to avoid shortages during manufacturing disruptions.
The PBM Problem: Who’s Really Profiting?
Here’s where things get messy. Most states outsource their pharmacy benefits to Pharmacy Benefit Managers (PBMs)-companies like OptumRx, Magellan, and Conduent. These middlemen negotiate discounts with drugmakers, process claims, and manage formularies. But they also take a cut. And often, the cut isn’t transparent. A 2024 survey by the National Association of Medicaid Directors found that 27 states implemented new PBM transparency rules last year. Nineteen of them now require PBMs to disclose exactly how much they paid for each generic drug. Why? Because some PBMs were charging Medicaid more than they paid the pharmacy-keeping the difference as profit. That’s not just unethical; it’s inflationary. Independent pharmacies reported that 74% of them faced delayed payments or claim denials because of MAC list mismatches. A pharmacy might buy a generic for $1.20, but if the state’s MAC list says $1.00, they get paid $1.00-even if the market price is $1.50. That’s a loss. And when pharmacies lose money, they stop carrying the drug. That’s how shortages start.What’s Next? The Battle Over GLP-1s and Beyond
While states have focused on traditional generics, a new wave of high-cost drugs is coming. GLP-1 medications-like Ozempic and Wegovy-are now being used for obesity and diabetes. The annual cost? Around $12,000 per patient. Thirteen state Medicaid programs cover them, but only with strict prior authorization. The federal government is considering a rule that would require Medicaid and Medicare to cover these drugs for obesity treatment. If it passes, it could add $1.2 billion in annual costs across state programs. Meanwhile, the Congressional Budget Office predicts that by 2027, state-level policies targeting generics could cut spending by $3.8 billion a year. But there’s a warning: if states push too hard, manufacturers might quit the market entirely. That’s already happening with some low-margin generics. If a drug costs $0.10 a pill to make but the state pays $0.08, companies stop producing it. Then patients go without.
The Tightrope: Cost Control vs. Access
Every state is walking a line. Cut prices too much, and patients lose access. Let prices rise, and the budget explodes. The best-performing states-like Oregon, Texas, and Maryland-have found a balance. They use MAC lists, but update them weekly. They demand PBM transparency. They stockpile critical drugs. And they don’t try to micromanage every price. The real breakthrough? Collaboration. Oregon and Washington now run a multi-state purchasing pool, negotiating bulk rebates for 47 high-volume generics. It’s not a federal fix. But it’s working.What States Should Avoid
Some policies sound good on paper but backfire. Setting rigid price caps? That can trigger shortages. Forcing pharmacies to use only one generic? That removes competition. Ignoring PBM profits? That’s like trying to fix a leaky roof while ignoring the gutter. The lesson is simple: transparency, flexibility, and collaboration beat rigid control every time.Comments (9)
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John Watts February 9, 2026I've been on Medicaid for years, and I can tell you-generic insulin used to be $20 a month. Now? $120. And don't even get me started on how pharmacies get stiffed by MAC lists. I've had my script denied because the system says the drug costs $1.05, but the pharmacy paid $1.10. That's not cost control-that's just cruelty disguised as budgeting.
States need to update those lists weekly, not monthly. And PBMs? They're the real crooks. They're the ones pocketing the difference while pharmacies and patients suffer. Someone needs to slap a tax on those middlemen.
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Randy Harkins February 11, 2026This is such an important breakdown. 🙏 I never realized how little rebate states get on generics-13%? That’s barely a Band-Aid on a gunshot wound. And the fact that Oregon and Washington are pooling purchases? Genius. Why haven’t more states done this? It’s like we’re all trying to solve the same puzzle with our eyes closed.
Also, love that you mentioned stockpiling. We need to treat critical generics like emergency water supplies. If a hurricane hits and your pharmacy runs out of antibiotics? That’s not a supply chain issue-that’s a public health crisis.
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Chima Ifeanyi February 11, 2026Let’s not romanticize state-level interventions. The entire Medicaid drug rebate framework is a neoliberal farce built on hollow metrics. The 13% rebate is a mathematical fiction-calculated on AMP, which is itself manipulated by manufacturers through channel stuffing and phantom discounts. PBMs aren’t the problem; they’re symptoms of a deeper structural collapse in pharmaceutical capitalism. You can’t regulate your way out of a market where three firms control 67% of injectables. This is oligarchic rent-seeking disguised as public policy.
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Tori Thenazi February 12, 2026Wait… wait… wait. So you’re telling me that PBMs are CHARGING Medicaid MORE than they PAID the pharmacy?!?!?!?!?!? That’s not just shady-that’s a felony. 🚨 I knew it. I KNEW IT. This is all connected to the shadow government. I’ve been saying this for YEARS. The FDA, the CDC, the PBMs-they’re all in cahoose with Big Pharma. They’re letting people die so they can profit. And now they’re gonna make us pay $12k for Ozempic?!?! I’m not even diabetic and I’m scared. Someone call the FBI. And the CIA. And my senator. And my dog’s vet.
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Elan Ricarte February 13, 2026Man, I’ve seen this play out in my small town pharmacy. You got a guy who needs blood pressure meds, right? He’s on Medicaid. The drug costs $0.80 to make. The pharmacy buys it for $1.20. MAC list says $1.00. So they get paid $1.00. They lose 20 cents per pill. After 500 prescriptions? That’s $100 in the red. They stop stocking it. Next thing you know, the guy drives 40 miles to the next town. Or he skips doses. Or he ends up in the ER. And then the state spends $12,000 on a hospital stay instead of $10 on pills.
It’s not rocket science. It’s basic math. And yet, we let bureaucrats write rules like they’re playing Monopoly with real people’s lives.
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Simon Critchley February 13, 2026The PBM model is a textbook case of agency theory failure. The principal (state Medicaid) outsources to an agent (PBM) with asymmetric information, leading to moral hazard. The lack of price transparency creates a perverse incentive structure where the agent maximizes its own surplus at the expense of the principal. The 2024 state transparency mandates are a necessary but insufficient corrective. What’s needed is a fiduciary duty standard-PBMs must act in the best interest of the beneficiary, not their shareholders. Until then, we’re just rearranging deck chairs on the Titanic.
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Karianne Jackson February 14, 2026I just want to say thank you for writing this. I’m a single mom on Medicaid. My kid needs his ADHD meds. The generic version changed last month and now it’s hard to find. I cried in the pharmacy. I didn’t know it was because of all this stuff. I just thought I was bad at finding pharmacies. You made me feel less alone.
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Andy Cortez February 16, 2026So let me get this straight-states are trying to save money by making pharmacies lose money? That’s like trying to fix a broken car by smashing the tires. You think that’s gonna make the car go faster? Nah. It’s gonna break. And then you’re stuck on the side of the highway with no gas, no money, and a bunch of people yelling at you for not having a spare tire. This whole system is a dumpster fire wrapped in a PowerPoint presentation.
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Jessica Klaar February 16, 2026I work in a rural clinic. We’ve had patients go without their heart meds for weeks because the pharmacy ran out and the state’s MAC list hadn’t been updated. It’s not about politics. It’s about dignity. Everyone deserves to take their medicine without having to beg, drive 70 miles, or choose between food and refills. Oregon’s multi-state pool? That’s the kind of smart, human-centered policy we need more of. Let’s stop treating healthcare like a spreadsheet and start treating it like a lifeline.
