How state Medicaid programs pay pharmacies for generics

In the quarter that ended in September 2026, Tennessee's Medicaid program paid a pharmacy that fills fewer than 65,000 prescriptions a year a professional dispensing fee of $13.16 per prescription, on top of the cost of the drug. A pharmacy that failed to give a usable response to three of the state's mandatory cost surveys got $5.00, according to CMS's state-by-state summary¹ of Medicaid pharmacy payment rules.

Both numbers come from the same federal requirement. Since 2016, a state Medicaid program that pays pharmacies directly must pay for a drug in two parts: what the pharmacy actually paid to acquire it, and a fee that covers the cost of dispensing it. States choose how to measure each part, and CMS approves the method. The result is 53 sets of rules, one each for the 50 states, the District of Columbia, Puerto Rico and Guam in the CMS summary, that differ in method more than in principle.

That direct, fee-for-service channel handled about 311 million of the roughly 757 million Medicaid prescriptions filled in fiscal 2024, according to MACPAC², and 85 percent of those fee-for-service prescriptions were generics. The other 446 million went through managed care plans, which pay pharmacies under their own contracts. This explainer covers the fee-for-service rules: the 2016 rule, the menu of ways states set acquisition cost, how dispensing fees are set, and the 2024 rule that tightened the data states must show. For rebates and federal caps, see our piece on how Medicaid pays for generic drugs.

The 2016 rule

CMS published the Covered Outpatient Drugs final rule, CMS-2345-FC, in the Federal Register on Feb. 1, 2016³. It took effect April 1, 2016, and gave states until June 30, 2017, to file state plan amendments taking effect no later than April 1, 2017.

Before the rule, states paid based on an "estimated acquisition cost," and many estimated it from average wholesale price, a list price. CMS's NADAC methodology document⁹ recounts that the HHS Office of Inspector General found AWP-based payment "fundamentally flawed" and that it caused Medicaid to pay too much for certain drugs. The 2016 rule replaced the estimate with actual acquisition cost, which federal regulations at 42 CFR 447.502⁵ define as "the agency's determination of the pharmacy providers' actual prices paid to acquire drug products marketed or sold by specific manufacturers."

The same section renamed the dispensing fee a "professional dispensing fee" and defined what it may cover, including a pharmacist's time checking coverage, drug utilization review, filling the container, counseling, delivery and the overhead of running the pharmacy. The payment ceiling is in 42 CFR 447.512(b)⁶: in the aggregate, a state may pay no more than the lower of acquisition cost plus the professional dispensing fee, or the pharmacy's usual and customary charge to the general public.

Many generics also fall under a federal upper limit. Under 42 CFR 447.514⁷, CMS sets one for multiple-source drugs at 175 percent of the weighted average of manufacturers' average manufacturer prices, and it publishes the limits monthly on its federal upper limit page¹¹. The limit applies to a state's spending in the aggregate, not to each claim, as our explainer on the federal upper limit sets out.

Four ways to set acquisition cost

CMS told states how they could meet the new standard in a letter to state Medicaid directors dated Feb. 11, 2016⁴. It listed four examples.

By GxRadar's count of the September 2026 summary¹, NADAC appears in the ingredient-cost formula of 47 of the 53 programs. The six that do not name it are Alabama, Georgia, Idaho, Iowa and Montana, which use state acquisition cost files, and Guam, which bases its maximum allowable cost on average wholesale price. A state that wants to use NADAC must still file a state plan amendment, CMS says on its Retail Price Survey page¹⁰. The survey letter CMS's contractor sends to pharmacies, reproduced in the methodology document, tells them that "more than 40 state Medicaid programs utilize the NADAC as a part of their reimbursement methodology." Our explainer on what NADAC measures covers the benchmark itself.

The lower-of calculation

Most states do not pay a single benchmark. They pay the lowest of several. Indiana, for example, pays the lower of NADAC, its state maximum allowable cost, the federal upper limit or wholesale acquisition cost, plus a $10.48 professional dispensing fee. Pennsylvania's generic formula compares the pharmacy's usual and customary charge, NADAC, the federal upper limit and its state MAC.

For a cheap generic, that structure puts most of the money in the fee. The table applies Indiana's fee to GxRadar's October 2026 NADAC figures from the 2026 NADAC files¹³, using each drug's typical fill in Medicaid's 2025 utilization data¹⁴, and assumes NADAC is the lowest of Indiana's comparison prices. It is an illustration of the formula, before any beneficiary copay, and not a record of actual claims.

How dispensing fees are set

The 2016 rule did not set a fee. CMS wrote in its 2016 letter that it did "not intend to mandate a specific formula or methodology" for professional dispensing fees, but that states must support any change with "a state or national survey of retail pharmacy providers or other reliable data." Several programs in the summary tie the fee to a pharmacy's annual prescription volume and pay more to low-volume stores.

Texas is the exception to a flat fee. Its summary entry describes a formula built from the acquisition cost, a fixed component and a variable percentage, plus a delivery incentive and a preferred generic incentive. Our explainer on how dispensing fees work compares the approaches.

The 2024 rule on supporting data

CMS returned to pharmacy payment in a final rule published Sept. 26, 2024¹², which took effect Nov. 19, 2024. It revised 42 CFR 447.518(d)⁸ to require states to submit "adequate cost-based data" when they propose changing either part of the formula. For dispensing fees, CMS wrote, acceptable data "could be a State's own survey, a neighboring States' survey, or other credible survey data," and states cannot rely on what other third-party payers pay pharmacies. For ingredient cost, the preamble added that "freezing NADAC or AAC rates, and establishing a static provider reimbursement, would not be consistent with applicable laws and regulations." CMS did not set how often states must restudy their fees, though it encouraged periodic reviews.

What to watch

CMS updates the state summary each quarter, with the pharmacy pricing files on its pharmacy pricing page¹⁵. Because 47 programs lean on NADAC, a change to how CMS calculates it reaches most state formulas at once. The three-month moving average CMS adopted for generic rates in December 2024 is, in the methodology's words, a "temporary, short-term measure," and the agency has said it plans to seek stakeholder input on a permanent approach. How a pharmacy can ask CMS to review a single rate is covered in our explainer on NADAC rate reviews.