Generic Prescribing Incentives: How States Drive Generic Drug Use to Cut Costs

When you fill a prescription, you might not think about whether you’re getting the brand-name drug or the generic version. But behind the scenes, state governments are actively pushing pharmacists and doctors to choose generics - not because they’re less effective, but because they’re cheaper. And it’s working. In 2025, nearly every state has some kind of policy in place to make generic drugs the default choice. These aren’t random rules. They’re carefully designed financial and legal incentives meant to save billions in public and private healthcare spending.

How States Push for Generic Drugs

States don’t force doctors to write only generic prescriptions. Instead, they make it easier - and cheaper - for patients and providers to choose them. The most common tool? Preferred Drug Lists (PDLs). These are lists of medications that Medicaid and other state-run programs prefer because they’re cost-effective. If a doctor prescribes a drug that’s not on the list, the patient often pays more out of pocket, or the prescriber has to jump through hoops to get approval.

As of 2019, 46 out of 50 states had PDLs for their Medicaid programs. Twenty states review these lists every year. Ten do it quarterly. That means the lists aren’t static. They’re updated based on new data, price changes, and whether a generic version just hit the market. If a brand-name drug drops its price dramatically, it might get added to the list. If a generic becomes available and costs 80% less, the brand-name version gets bumped off.

Why Copayments Matter More Than You Think

One of the most powerful levers states use is the difference in patient copayments. Let’s say you need a blood pressure medication. The brand-name version costs $40 with a $20 copay. The generic? Same effectiveness, same side effects, but a $5 copay. Which one are you more likely to pick? The answer is obvious - unless you’re told otherwise.

States have been increasing this gap for years. In the late 1990s, the difference between brand and generic copays was small. Now, it’s common to see $15-$30 differences. That’s not an accident. Research from the National Institutes of Health found that when patients pay more for brand-name drugs, they switch to generics - and they do it fast. In fact, the effect of a $3 higher copay for a brand drug is about the same as a presumed consent substitution law. That means changing what patients pay at the counter can be just as powerful as changing how pharmacists operate.

Pharmacist Substitution: Presumed Consent vs. Explicit Consent

Here’s where things get interesting. In most states, when a doctor writes a prescription for a brand-name drug, the pharmacist can legally swap it for the generic - unless the doctor says “do not substitute.” That’s called presumed consent. In 11 states, the pharmacist has to ask you first. That’s explicit consent.

The difference? Huge. A 2018 NIH study showed that states with presumed consent laws saw a 3.2 percentage point increase in generic dispensing compared to states requiring patient permission. That might sound small, but it adds up. If all 39 explicit consent states switched to presumed consent, they could save $51 billion a year in drug spending. That’s not theoretical. It’s a real number based on actual prescription data.

Why does this work? Because pharmacists are already incentivized to dispense generics - they make more profit on them. But when they have to ask you, you might say no. You might think, “My doctor prescribed this brand. It must be better.” You don’t know that generics are required by the FDA to be just as safe and effective. Presumed consent removes that barrier.

The Medicaid Rebate System: The Hidden Engine

None of this would work without the Medicaid Drug Rebate Program. Created in 1990, this federal program forces drugmakers to give states a discount on every prescription filled through Medicaid. For generics, the minimum rebate is 13% of the average manufacturer price. But here’s the kicker: most states negotiate even bigger discounts.

As of 2019, 46 states had supplemental rebate agreements with generic manufacturers - meaning they paid even less than the federal minimum. These deals are secret, but they’re critical. Without them, the cost savings from generics wouldn’t be enough to justify the administrative work of managing PDLs or copay differentials.

States also use Maximum Allowable Cost (MAC) lists. These set the highest price a pharmacy can be reimbursed for a generic drug. If a pharmacy tries to bill $15 for a generic that the MAC says is worth $8, they only get $8. This keeps prices down and prevents pharmacies from charging more than the market allows.

What Doesn’t Work: Mandatory Substitution Laws

You might think that forcing pharmacists to substitute generics every time would be the most effective strategy. But it’s not. A 2018 study found that mandatory substitution laws - where pharmacists must swap generics regardless of patient or doctor preference - had no measurable impact on dispensing rates.

Why? Because pharmacists were already substituting anyway. They made more money on generics. They had less paperwork. They didn’t need a law to tell them what to do. The real problem wasn’t pharmacist behavior - it was patient perception and doctor habits. That’s why policies that target patients (copays) or remove friction (presumed consent) work better than rules that target pharmacists.

The 340B Program: A Double-Edged Sword

The 340B Drug Pricing Program lets safety-net hospitals and clinics buy drugs at steep discounts - often 20% to 50% off. These savings help serve low-income patients. But here’s the catch: when these clinics use Medicaid to pay for 340B drugs, states have to reimburse them based on the 340B ceiling price, not the usual reimbursement rate.

That created a mess. Some states were paying more than the actual cost of the drug. Others were paying less. In 2016, CMS stepped in and said: “No more. Reimbursement can’t exceed the 340B ceiling price.” That change forced states to rework their payment systems. It also made it harder for clinics to use expensive brand-name drugs, pushing them toward cheaper generics - even if they weren’t on the PDL.

Why Generic Use Is Rising - But Spending Isn’t Falling

You’d think more generic use means lower drug spending. And it should. But it doesn’t always.

From 1993 to 1998, generic prescriptions jumped from 33% to 45%. That’s a big win. But total spending on drugs kept rising - because new brand-name drugs were coming out at $10,000, $20,000, even $50,000 a year. One expensive new drug can wipe out the savings from thousands of cheap generics.

That’s why states can’t just rely on promoting generics. They also need to control the prices of new drugs. Some are starting to. A few states now use “value-based” pricing, where they pay more for drugs that deliver better outcomes. But most still focus on the low-hanging fruit: generics.

The Future: The Medicare Drug List

The federal government is watching. In 2023, CMS started developing the Medicare $2 Drug List - a plan to make certain low-cost generics available for just $2 a month to Medicare Part D enrollees. It’s voluntary, but if it works, it could become a national model.

States are already using similar ideas. If a generic drug costs less than $10, some states cap the copay at $5. Others have “$0 copay for generics” programs for chronic conditions like diabetes or high blood pressure. The Medicare $2 model could push more states to adopt even simpler rules: if it’s a generic, and it’s cheap, the patient pays almost nothing.

What’s at Risk: Generic Manufacturers Leaving Medicaid

There’s a dark side. Generic drugmakers aren’t always happy with how Medicaid works. The program requires them to pay inflation rebates - meaning if a drug’s price goes up even slightly, they owe the state more money. But here’s the problem: sometimes, the price doesn’t go up. The cost of ingredients does. Or there’s a shortage. Or the drug is old and no one’s buying much of it anymore.

Avalere Health found five scenarios where generic manufacturers end up paying rebates even though they didn’t raise prices. In those cases, they lose money. And when they lose money, they stop making the drug. Or they quit selling it to Medicaid altogether.

That’s a real threat. If a state saves $10 million by pushing a generic, but the manufacturer stops making it, the state ends up with no supply - and no savings. That’s why some experts warn that pushing too hard on rebates could backfire. The goal isn’t just to cut costs today. It’s to keep generics available tomorrow.

What Works Best - And What Doesn’t

Let’s cut through the noise. Based on data from 2019 to 2025, here’s what actually moves the needle:

• Works great: Presumed consent laws, copay differentials ($15+ gap), Preferred Drug Lists with annual reviews, MAC lists, supplemental Medicaid rebates.
• Doesn’t work: Mandatory substitution laws, provider-only education campaigns, penalties on pharmacists for dispensing brands.
• Emerging: $2 or $5 generic copay programs, value-based pricing for new drugs, federal models like the Medicare $2 Drug List.

The pattern is clear: policies that make it easy and cheap for patients to choose generics win. Policies that punish providers or pharmacists don’t change behavior - because they were already doing the right thing.

What You Can Do

If you’re on Medicaid, Medicare Part D, or even a private plan with a formulary, ask your pharmacist: “Is there a generic version?” Don’t assume the brand is better. It’s not. Ask your doctor: “Can we try the generic?” Most will say yes.

If you’re paying $30 for a brand-name drug that has a $5 generic, you’re not saving money - you’re paying extra. You’re also helping your state’s program work better. More generic use means lower premiums for everyone.

Generic drugs aren’t a loophole. They’re the law of economics. And when states design smart incentives, they save billions - without sacrificing care.