How Medicaid preferred drug lists work

In federal fiscal year 2023, Arizona's fee-for-service Medicaid program listed 237 brand-name drugs as preferred over their own generic equivalents, because the brand cost the state less after rebates. That count comes from CMS's national Medicaid drug utilization review report¹ for that year, which asked every state how many innovator drugs it preferred "based on net pricing." Of 51 programs reporting, 46 named at least one. The median was 65.

Those choices are made on a preferred drug list, or PDL, the tool nearly every state uses to steer prescribing in Medicaid. In a 2019 survey of state Medicaid officials, KFF⁶ found that 46 of 50 responding states had a PDL for fee-for-service prescriptions and also negotiated supplemental rebates for the drugs on it.

This piece explains the federal law that allows PDLs, how drugs land on them, how supplemental rebates work, and why a generic can lose its spot to the brand it copies. Whether a specific drug is preferred in a given state is set out on that state's published list, and a pharmacist can check it at the counter.

What federal law allows

Drug coverage is optional in Medicaid, but Medicaid.gov³ says all states provide it. The terms come from section 1927 of the Social Security Act, codified at 42 U.S.C. 1396r-8⁴. A manufacturer that wants its drugs paid for must sign a national rebate agreement; about 780 manufacturers take part, according to CMS's rebate program page¹⁰. In exchange, as MACPAC⁵ puts it, states "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."

Its limits are specific. A state "may subject to prior authorization any covered outpatient drug," under subsection (d)(1)(A). Under (d)(5), a prior authorization system must respond "within 24 hours of a request" and must allow dispensing of "at least 72-hour supply" of a covered drug in an emergency. States typically enforce a PDL through that power. KFF notes that a state may require prior authorization for a drug not on the list or attach a higher copayment. The statute separately allows a formal formulary under (d)(4), developed by a committee of physicians, pharmacists and others appointed by the governor, and says a prior authorization program "is not a formulary subject to the requirements" of that paragraph.

States can also charge more for non-preferred drugs. Federal rules at 42 CFR 447.53⁸ allow "differential cost sharing for preferred and non-preferred drugs," within limits covered in our explainer on Medicaid prescription copays.

How a drug gets on the list

Most states use a pharmacy and therapeutics (P&T) committee to review drug classes. The KFF survey counted 39 states with a P&T committee as of July 1, 2019, and found the committee decided placement of new drugs in 29 states. Others handed that job to the state's drug utilization review board or to Medicaid agency staff.

The DUR board is required by law. Under section 1927(g)(3)⁴, between one-third and 51 percent of its members must be practicing physicians and at least one-third practicing pharmacists. CMS collects each state's answers in annual DUR reports². In the 2023 fee-for-service report, 49 of 51 programs said they had a documented process, such as prior authorization, for patients or prescribers to get a non-PDL drug "when medically necessary." Hawaii and New Jersey answered not applicable.

Committees usually weigh clinical evidence first and net cost second. Net cost is where rebates come in.

Supplemental rebates

Federal Medicaid rebates are fixed by formula. The statute sets the basic rebate for brand drugs at no less than 23.1 percent of average manufacturer price and the rebate for generics at 13 percent, as our pieces on average manufacturer price and the Medicaid rebate program and generics explain. States can bargain for more. Section 1927(a)(1) lets the HHS secretary "authorize a State to enter directly into agreements with a manufacturer," and the PDL gives the state something to offer in return, a preferred slot.

CMS keeps a table of approved supplemental rebate agreements⁷. As of September 2026 it showed:

Every state, the District of Columbia and Puerto Rico appear with at least one agreement. Some are new. New Jersey's single-state agreement took effect January 1, 2026, and Hawaii's and New Mexico's on July 31, 2026. The same three states, along with South Dakota, were the four that told KFF in 2019 they had no PDL. KFF also found that 30 states had joined multi-state purchasing pools "to enhance their negotiating leverage and collections." A footnote to the CMS table cites section 2501(c) of the Affordable Care Act as the basis for collecting supplemental rebates on drugs dispensed through managed care plans.

When the brand is preferred over its generic

Generics dominate Medicaid by volume. CMS's 2023 DUR report put the average generic utilization rate at 86 percent of claims and generics at 18 percent of spending, consistent with 2022; our analysis of generic use in Medicaid has more. Supplemental rebates can still tip a class toward the brand. A brand that has lost exclusivity may offer a rebate deep enough that its net price falls below the generic's, which is the "net pricing" the DUR survey asks about.

GxRadar counted 12 programs with 100 or more brand-preferred drugs in the CMS table. A brand-preferred listing changes what the pharmacy dispenses and bills, which interacts with state generic substitution laws. It does not change the federal rebate structure behind the generic, or what pharmacies pay to buy it, which our NADAC price tracker follows. How states set pharmacy payment for generics is covered in how state Medicaid programs pay for generics and the federal upper limit.

Managed care and uniform lists

Most Medicaid prescriptions now run through managed care. MACPAC data¹¹ for fiscal year 2024 show 446 million of 757 million Medicaid prescriptions paid by managed care plans, and CMS's managed care DUR report¹² for 2023 covered plans enrolling 57.2 million people with a pharmacy benefit. Those plans can run their own formularies unless the state sets rules. In the fee-for-service DUR report, 29 of 41 states answering said they set requirements for plans' pharmacy benefits, and 22 required plans to use the same PDL as the state. KFF counted 16 managed care states with a uniform PDL for some or all drug classes in 2019, with eight more planning to set one up or expand it.

KFF describes a uniform PDL as one requiring all managed care plans "to cover the same drugs as the state," so the preferred options do not change when an enrollee changes plans.

The next change is procedural. CMS's April 2026 proposed rule⁹ would require state Medicaid fee-for-service programs and Medicaid managed care plans, among others, to support electronic prior authorization for drugs beginning October 1, 2027. That would change how a non-preferred request travels, though not which drugs a state prefers. The rule was still pending in early November 2026. Our explainers on prior authorization and how a pharmacy claim is processed follow that path.