Medicaid and Generics: How Generic Drugs Save Money for Low-Income Patients

For millions of low-income Americans on Medicaid, the difference between a generic drug and a brand-name one isn’t just about the label on the bottle-it’s about whether they can afford to take their medicine at all. In 2023, 90-91% of all prescriptions filled through Medicaid were for generic drugs. Yet these same generics made up just 17.5% of total Medicaid drug spending. That’s not a coincidence. It’s the result of a system designed to keep costs down for people who can’t afford high prices.

Why Generics Are the Backbone of Medicaid

Medicaid doesn’t just cover generics-it relies on them. The program pays for over 1.5 billion prescriptions each year, and nearly all of them are for generic medications. Why? Because they work just as well as brand-name drugs but cost a fraction of the price. A 2022 study from the Association for Accessible Medicines found that the average copay for a generic drug under Medicaid was $6.16. For brand-name drugs? $56.12. That’s almost nine times more.

This isn’t just about patient wallets. It’s about keeping the whole system running. Medicaid’s Drug Rebate Program, created in 1990, forces drugmakers to give states a discount on every prescription they cover. For generic drugs, those rebates average 86% of the retail price. That means if a generic pill costs $10 at the pharmacy, Medicaid only pays about $1.40 after the rebate. That’s how the program stretches its budget so far.

How Much Money Are We Talking About?

In fiscal year 2023, Medicaid saved $53.7 billion through drug rebates alone. That’s more than the entire annual budget of many U.S. states. These savings come mostly from generics. Without them, Medicaid’s prescription drug spending would be over $100 billion a year instead of the $60 billion it spent in 2024 after rebates.

But here’s the twist: even though generics make up 90% of prescriptions, they don’t drive the biggest costs. That’s where specialty drugs come in. Less than 2% of Medicaid prescriptions are for drugs that cost over $1,000 per claim-like cancer treatments or rare disease therapies. Yet those few drugs made up more than half of all Medicaid drug spending in 2021. That’s why, despite all the savings from generics, Medicaid’s net drug spending still jumped from $38 billion in 2021 to $60 billion in 2024.

Generics vs. Brand Names: A Real-Life Comparison

Think about a person managing high blood pressure. If they’re on a brand-name drug like Lisinopril HCTZ, their copay could be $50 or more. Switch them to the generic version, and the copay drops to $5. That’s not a small difference-it’s the difference between taking the medicine every day or skipping doses because they can’t afford it.

According to data from the Medicaid and CHIP Payment and Access Commission, 93% of generic prescriptions cost less than $20 at the pharmacy counter. Only 59% of brand-name prescriptions do. That’s why generics are the reason so many low-income patients can stick to their treatment plans. A Stanford Medicine policy brief found that since 2009, generic drugs have saved the U.S. healthcare system over $2.9 trillion. That’s not just a number-it’s millions of people who didn’t have to choose between rent and their medication.

Who’s Making the Money? The Hidden Costs in the Supply Chain

It’s not all sunshine and savings. Behind the scenes, Pharmacy Benefit Managers (PBMs)-middlemen who handle drug pricing and distribution-take a big cut. In Ohio alone, PBMs collected 31% in fees on $208 million worth of generic drugs in one year. That’s over $64 million in fees on drugs meant to be cheap. Those fees don’t always translate into lower prices for patients. Sometimes, they just eat into the savings Medicaid worked so hard to create.

Even when drug prices drop, copays don’t always follow. Some states have rigid copay structures that don’t adjust quickly when a generic’s wholesale price falls. A patient might see their generic drug cost $2 less at the pharmacy, but still pay the same $10 copay because the system hasn’t updated. That’s why some Medicaid users report frustration-even when the drug is cheaper, their out-of-pocket cost stays the same.

What About Other Programs? Is Medicaid Doing Better?

Yes. Medicaid gets better prices than almost any other program in the country. A 2021 Congressional Budget Office study found that Medicaid’s net drug prices-after rebates-are lower than those of the Department of Veterans Affairs, Medicare Part D, and even private insurers. For brand-name drugs, Medicaid gets rebates equal to 77% of the retail price. Medicare Part D, which covers seniors, gets only about 50%.

Some people point to companies like Mark Cuban Cost Plus Drug Company as cheaper alternatives. But a 2023 study found that for the average person on Medicaid, buying generics from a pharmacy with their Medicaid card still saved more than buying the same drug directly from these online retailers. Why? Because Medicaid’s rebate system is built into the pharmacy network. You don’t need to shop around. The system does it for you.

What’s Changing Now?

In 2024, the Centers for Medicare & Medicaid Services (CMS) launched the GENEROUS Model-a new program aimed at cutting rising drug costs. It’s focused on better formulary design, reducing unnecessary prescriptions, and making sure rebates actually reach patients. States are also starting to limit prior authorization for generics. In the past, even a simple generic might need a doctor’s note before being approved. Now, many states have removed those barriers for common medications.

There’s also talk about extending the Medicare drug price negotiation rules to Medicaid. If Congress does that, it could save an extra $15-20 billion over ten years. And as more biologic drugs lose patent protection, biosimilars-generic versions of complex biologic drugs-could add another $100 billion in savings by 2027.

What Low-Income Patients Need to Know

If you’re on Medicaid, here’s what you should remember:

• Always ask if a generic version is available. Pharmacists are required to substitute unless your doctor says no.
• Your copay for generics is almost always under $10. If it’s higher, ask why.
• Don’t assume a brand-name drug is better. Generics have the same active ingredients, same FDA approval, same effectiveness.
• Some states have formularies that change slowly. If your medication was just approved as generic but your copay hasn’t dropped, call your state Medicaid office.
• Prior authorization can still be a hurdle. If your drug was switched to generic but you’re being asked for paperwork, keep pushing. Many of these rules are being relaxed.

Medicaid’s success isn’t about spending more. It’s about spending smarter. Generics are the quiet hero of the program. They let a single mother with diabetes afford her insulin. They let a veteran with arthritis get his pain relief without choosing between food and medicine. They keep the system from collapsing under its own weight.

But the fight isn’t over. As specialty drugs get pricier and PBMs take bigger cuts, the savings from generics are under pressure. The goal now isn’t just to keep using generics-it’s to protect the system that makes them so affordable.

What Comes Next?

The future of Medicaid’s drug spending depends on two things: how well states manage the rise of high-cost specialty drugs, and how much they push back against pharmacy middlemen who take too big a share. But as long as generics remain the default choice, millions of low-income patients will keep getting the care they need-at a price they can afford.