The federal upper limit, Medicaid's ceiling on generic drug payments

CMS's October 2026 federal upper limit file set Medicaid payment ceilings for 1,543 groups of generic drugs, by GxRadar's count of the ACA Federal Upper Limits dataset⁸. For 917 of those groups, about 59 percent, the formula's starting point, 175 percent of the average price manufacturers reported, came out lower than what pharmacies were paying. In each of those cases CMS raised the limit to match the national average pharmacy acquisition cost.

Formally, the federal upper limit, or FUL, caps how much federal money flows to state Medicaid programs for multiple-source drugs, which in practice means most generics, the drugs that fill most Medicaid prescriptions. Few patients will ever see the number. It matters because it is the federal government's main check on what states pay pharmacies for generic ingredients, and because its design ties two other benchmarks together: the manufacturer prices behind Medicaid rebates and the pharmacy survey prices behind NADAC. This piece traces where the 175 percent rule came from, how CMS calculates the limit each month, how states apply it, and what the latest file shows.

From 150 percent to 175 percent

Lawmakers and CMS have rewritten the FUL several times. Today's version comes from section 2503 of the Affordable Care Act, which the Medicaid drug statute¹ now reflects.

Dates come from the statute's amendment notes, CMS's federal upper limit page⁵ and the agency's February 2016 letter to state Medicaid directors⁷. The statute's wording is specific: the limit must be "no less than 175 percent of the weighted average (determined on the basis of utilization) of the most recently reported monthly average manufacturer prices" for equivalent products sold to retail community pharmacies nationwide. Our guide to drug price benchmarks sets the FUL beside AMP's cousins, WAC and NADAC.

How CMS calculates it each month

CMS's methodology and data elements guide⁶ lays out the steps. Drugs with the same ingredient, strength, dosage form and route form a FUL product group. Only versions FDA rates as therapeutically equivalent, the A-rated products in the Orange Book, count toward the average, and a group needs at least three of them, each with reported AMPs and units, before CMS calculates a limit. Brand-name versions marketed under the original application are included in the average alongside generics. Our guide to therapeutic equivalence codes explains the ratings.

CMS multiplies the group's weighted average AMP by 175 percent and compares the result to the generic NADAC rate. If the 175 percent figure is lower, the FUL is set equal to NADAC instead. That exception is written into 42 CFR 447.514(b)(2)², and the published file flags which rule applied to each group.

Some products get no FUL at all. The guide says CMS skips groups that cannot be matched one-to-one to a NADAC price, which generally includes creams, ointments and liquids sold by the gram or milliliter, drugs sold both by prescription and over the counter, and products sold in more than one type of packaging. Injectables and other "5i" drugs not usually dispensed by retail pharmacies are also left out. Even some common tablets go without one: the October file lists FUL groups for three strengths of carvedilol but none for the 25 mg tablet, and the file does not say why.

FUL files are updated monthly and take effect the first day of the month after publication, and states have up to 30 days after that to put them in place, according to CMS's pharmacy pricing page⁹.

How states apply it

The FUL is an aggregate ceiling, and states do not have to pay it claim by claim. Under 447.514², a state's payments for listed drugs, before rebates, may not exceed in total what it would have paid at the FUL plus the state's professional dispensing fee. The 2016 letter⁷ told states they could instead pay based on NADAC or their own maximum allowable cost lists, as long as total spending stays within the limit. Each year, 447.518⁴ requires states to certify that their spending on multiple-source drugs met the cap.

There is one built-in exemption. Under 447.512(c)³, the limit does not apply when a prescriber certifies, in handwriting or an approved electronic equivalent, that a specific brand is medically necessary; the rule says a check-off box is not acceptable.

In practice the FUL shows up as one term in a "lower of" formula. KFF's March 2026 brief¹¹ describes pharmacy payment as typically the lesser of the state's acquisition-cost formula plus a dispensing fee, the FUL plus the fee, a state maximum allowable cost plus the fee, or the pharmacy's usual and customary charge. CMS's September 2026 state reimbursement table¹⁰ shows the pattern; Arkansas, for one, pays the lower of NADAC, a state average acquisition cost or the FUL for ingredient cost. GxRadar's piece on how Medicaid pays for generics follows that money further.

What the October 2026 file shows

GxRadar downloaded every group-level record in the October 2026 FUL file⁸ and compared it with the 2026 NADAC files¹² for blood pressure and cholesterol drugs we track. All figures are per tablet. The "basis" column is CMS's flag: NADAC means the FUL was raised to the acquisition-cost floor.

Two patterns stand out. Where the NADAC floor applies, the FUL sits almost exactly at what pharmacies pay, and small timing differences account for the rest. Where the 175 percent formula applies and AMP runs high relative to invoices, the ceiling can sit far above pharmacy cost: the amlodipine FUL is more than five times its NADAC. A state paying on NADAC would be well under the cap for that drug.

Over time, the share of groups set at the NADAC floor has moved around but stayed near or above half.

Across all 1,543 groups in the October 2026 file, the median FUL was 1.91 times the weighted average AMP, by GxRadar's calculation. So far the "no less than 175 percent" language has worked as a floor more often than a fixed multiplier. More on NADAC's role is in our NADAC explainer and how NADAC is calculated.

That dependence runs one way. Because NADAC sets the floor for most FUL groups, changes to the pharmacy survey flow straight into the federal cap. Since December 2024, monthly generic NADAC rates have been calculated as a three-month moving average, and CMS's pharmacy pricing page⁹ says the measure will continue until further notice while the agency plans to seek stakeholder input on the NADAC methodology.