Prescription Drugs

Outpatient prescription drug coverage is an optional benefit that all state Medicaid programs have elected to provide. In fiscal year (FY) 2017, Medicaid spent approximately $64.0 billion on outpatient prescription drugs and collected $34.9 billion in rebates, resulting in net drug spending of $29.1 billion, or about 5.1 percent of total Medicaid benefit spending that year. Although prescription drug spending growth has slowed over the past few years, controlling prescription drug spending remains a focus for policymakers because prescription drugs are expected to experience one of the largest growth rates in average annual spending among major health care goods and services over the next 10 years, due in part to the anticipated growth of new high-cost treatments (Sisko et al. 2019).

Under the Medicaid Drug Rebate Program, a drug manufacturer must enter into a Medicaid national drug rebate agreement with the Secretary of the U.S. Department of Health and Human Services in order for states to receive federal funding for using the manufacturer’s products. In exchange for the rebates, state Medicaid programs must generally cover all of a participating manufacturer’s drugs when prescribed for a medically accepted indication, although the states may limit the use of some drugs through preferred drug lists, prior authorization, and quantity limits. The rebates under the Medicaid Drug Rebate Program are defined in statute. States may also negotiate their own supplemental rebates with manufacturers.

The Medicaid Drug Rebate Program defines a covered outpatient drug generally as a drug that may be dispensed upon prescription and has been approved by the Food and Drug Administration for safety and effectiveness. Covered outpatient drugs do not include drugs provided and billed as part of a bundled service within certain setting such as an inpatient hospital or nursing facility stay. Physician-administered drugs may be eligible for a rebate as long as the drug meets the definition of a covered outpatient drug.

Learn more about how Medicaid pays for outpatient prescription drugs, MACPAC’s recommendations to improve the operations of the drug rebate program, and other issues.

• Payment for outpatient prescription drugs: how the rebate program works
• Payment for physician-administered drugs

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