Finnegan O'Sullivan
Feb 9
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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.