Medicaid Prescription Drug Spending: 5 Key Facts for 2026

Medicaid, the primary health coverage program for low-income individuals, covers roughly one in five Americans and is increasingly focused on managing prescription drug costs. In recent years, spending on these medications has grown substantially, driven in part by the emergence of expensive new therapies like GLP-1s for obesity and groundbreaking, but costly, cell and gene therapies. This growth coincides with a more precarious fiscal landscape for states, impacted by federal funding cuts and broader economic uncertainties. Both state and federal governments are prioritizing strategies to control rising pharmacy expenditures while ensuring access to necessary medications.

Drug Spending: A Relatively Small, But Growing, Share

Despite the increases, prescription drug spending still represents a relatively small portion of overall Medicaid expenditures, accounting for 6% in 2024. This is considerably less than spending on hospitals (38%), long-term care (37%), and provider services (15%). But, net spending on prescription drugs did increase by 46% between federal fiscal year 2019 and 2024, mirroring the overall growth in Medicaid spending (52%). The introduction of high-cost drugs, particularly GLP-1s and cell and gene therapies, is a significant factor driving this trend, putting pressure on state budgets. Several states reported experiencing substantial Medicaid budget pressures, including rising pharmacy costs, in recent surveys.

Affordability for Enrollees: Limited Cost-Sharing

Federal law places limits on out-of-pocket costs for Medicaid enrollees, ensuring access to prescriptions with minimal financial burden. Because Medicaid eligibility is tied to low income, the program is designed to provide affordable drug access. Cost-sharing, when it exists, is capped at $4 for preferred drugs and $8 for non-preferred drugs for those with incomes at or below 150% of the federal poverty level, with slightly higher amounts for those with higher incomes. Certain populations, like children and pregnant women, are exempt from cost-sharing altogether.

Despite these limits, cost-related barriers to medication access still exist. Over two-thirds of Medicaid enrollees take prescription medications, a rate comparable to those with private insurance (68%), but significantly higher than uninsured adults (37%). Uninsured adults are more likely to delay or forgo needed prescriptions due to cost (17%) compared to Medicaid enrollees (10%) and those with private insurance (8%). Even small out-of-pocket costs can be prohibitive for low-income families.

State-Level Administration: A Patchwork of Approaches

While federal law mandates Medicaid coverage of prescription drugs, states have considerable flexibility in how they administer the benefit. All state Medicaid programs cover prescription drugs, but the methods vary. As of July 2025, eight out of 42 states that contract with managed care organizations (MCOs) deliver the pharmacy benefit through fee-for-service, while the remaining states include it within the overall capitation rate paid to MCOs. Some states also “carve out” specific drugs from MCO capitation for separate management. Outpatient drugs are typically covered through the pharmacy benefit, while physician-administered drugs may be covered through the medical benefit, depending on how they are dispensed and billed.

Many states contract with pharmacy benefit managers (PBMs) to manage or administer the pharmacy benefit, performing services like negotiating rebates and adjudicating claims. As of July 1, 2023, 33 states reported contracting with a PBM for their fee-for-service pharmacy benefit. PBMs have faced increased scrutiny recently, with states adopting reforms to increase transparency and oversight. Congress also included PBM reforms in recent legislation, though Medicaid provisions were not included.

Medicaid Payments: A Complex System of Rebates and Costs

Total Medicaid spending on a prescription drug is determined by the amount paid to the pharmacy, less any rebates received from the manufacturer. Pharmacies receive payment based on the drug’s ingredient cost and a professional dispensing fee. Federal regulations require reimbursement based on the lesser of the actual acquisition cost (AAC) plus the dispensing fee, or the pharmacy’s usual and customary charge.

Manufacturers are required to provide rebates to Medicaid under the Medicaid Drug Rebate Program (MDRP) for most drugs. The rebate amount varies depending on whether the drug is brand-name or generic. For brand-name drugs, the rebate is the greater of 23.1% of the average manufacturer price (AMP) or the difference between AMP and the “best price” offered to other purchasers. The rebates are shared between states and the federal government, based on each state’s federal medical assistance percentage (FMAP).

In addition to federal rebates, most states negotiate supplemental rebates with manufacturers, often leveraging placement on a preferred drug list (PDL). As of September 2025, 48 states and the District of Columbia had supplemental rebate agreements in place.

Managing Expenditures: Utilization Controls and Payment Strategies

States employ a variety of strategies to manage prescription drug expenditures, including prior authorization, preferred drug lists, step therapy, and prescription/quantity limits. Prior authorization requires pre-approval for certain drugs, while PDLs encourage the use of lower-cost alternatives. Step therapy requires patients to try less expensive drugs before moving to more costly options.

The Centers for Medicare & Medicaid Services (CMS) has launched the Cell and Gene Therapy (CGT) Access Model, with participation from 33 states, the District of Columbia, and Puerto Rico, to improve access to these potentially transformative, but expensive, treatments for individuals with sickle cell disease. States are also exploring innovative payment strategies, such as value-based agreements, and participating in federal drug payment models to combat rising costs.

Looking ahead, states will continue to refine their approaches to managing prescription drug costs, balancing the need for affordability with the goal of ensuring access to innovative and effective treatments for their Medicaid enrollees. The ongoing evolution of the pharmaceutical market and the introduction of new, high-cost therapies will necessitate continued vigilance and adaptation.