Prescription drugs are changing rapidly — in innovation, utilization, and cost. Breakthrough therapies, including GLP-1s and cell and gene therapies (CGTs) offer transformative benefits for individuals but carry price tags that strain Medicaid budgets. Drug spending is rising faster than policy and financing structures can keep pace, challenging Medicaid programs to rethink how they manage the pharmacy benefit.
Medicaid agencies, among the nation’s largest purchasers of prescription drugs, must balance access, affordability and federal requirements — all within a pharmacy benefit management framework built decades ago and increasingly mismatched to today’s drug landscape. While new models from the Centers for Medicare & Medicaid Services (CMS) Innovation Center offer promising tools for states, their success depends on integration into a broader, system-wide pharmacy strategy that promotes seamless service delivery, robust financial oversight, and a member-centric experience to support long-term sustainability.
Until that shift happens, Medicaid leaders face pressing questions: how to adapt to rapid change without compromising access or affordability; how to leverage federal efforts at drug price negotiation and control; and how to ensure members fully benefit from innovation. Addressing these challenges requires more than piecemeal fixes — it calls for a fundamental rethinking of Medicaid’s pharmacy approach.
The Current Medicaid Drug Landscape
When Medicaid was established in 1965, prescription drugs were designated an optional coverage category, allowing state programs to decide whether to provide coverage. At the time, pharmaceuticals largely consisted of low-cost treatments for acute conditions, such as aspirin and penicillin. Today, pharmaceutical innovation has transformed care, especially for chronic and rare conditions, but at an increasingly higher cost. Congress established the Medicaid Drug Rebate Program (MDRP) in 1990 to offset these cost pressures, yet drug spending has continued to climb dramatically. Since the early 90s, prescription drug prices have grown at triple the rate of inflation. Even after rebates, net Medicaid drug spending rose nearly 50% between 2019 and 2024, from $31 billion to $46 billion.
Despite this significant growth in spending, Medicaid has traditionally treated pharmacy as a separate administrative benefit rather than a core health strategy. Programs have prioritized utilization management, unit-price control, and short-term budget containment over long-term health outcomes and downstream cost avoidance, relying on preferred drug list placement, utilization management, and MDRP rebates to reduce costs. But as the drug landscape evolves, so must Medicaid’s approach. With more than 70 million Medicaid members nationally — many with complex, long-term needs — effective pharmacy management is critical to member health, underscoring the need for a more integrated, forward-looking strategy.
Meeting Innovation Head On: GLP-1s and Cell and Gene Therapies
As pharmaceutical innovation speeds up — and corresponding costs rise — CMS’ Innovation Center has introduced models aimed at balancing spending, ensuring Medicaid member access, and helping public programs keep pace with innovative drugs. Early efforts focused on GLP-1s and CGTs offer a preview of how Medicaid prescription drug management could evolve.
From a public health perspective, GLP-1s are considered a major breakthrough because of their potential to address obesity and improve health outcomes. Originally approved for type 2 diabetes, they are also highly effective at treating obesity and related chronic conditions. However, their high-cost limits access for Medicaid members, as most states do not cover them for obesity. Even with limited obesity coverage in 2023, Medicaid spending on GLP‑1s (for multiple indications including diabetes and weight loss) neared $4 billion — about 9% of total prescription drug spending — prompting some states to scale back on optional obesity coverage due to cost pressures, a dynamic also present in employer-sponsored, commercial plans.
In 2025, the Innovation Center introduced the BALANCE model to improve GLP-1 affordability and access in Medicare and Medicaid by linking reduced, most‑favored‑nation pricing to outcomes, promoting use alongside lifestyle interventions, and requiring outcomes tracking to capture long-term financial and health outcomes. Though voluntary and limited to five years, BALANCE offers a roadmap for addressing high‑cost, high‑impact drugs by pairing coverage with prevention, care management, and lifestyle supports. In evaluating multiple clinical outcomes, behavior, and financial impact in this model, BALANCE challenges longstanding norms, including siloing pharmacy cost from total cost of care or relying on rebates or PDL management tactics to control costs.
Rare diseases such as sickle cell disease and Duchenne muscular dystrophy pose a parallel challenge for Medicaid programs. Collectively, rare diseases affect 25 – 30 million Americans and are often chronically disabling and costly. As a primary payer for long‑term services and disability care, Medicaid covers a large share of affected individuals. CGTs offer promising, potentially curative treatments, but one-time doses can cost several million dollars – upending a payment model designed for ongoing, incremental spending. Even so, these therapies may ultimately lower costs by reducing ongoing care and preventable complications.
While current CGTs focus on rare inherited conditions, the pipeline is expanding, with dozens more therapies expected — intensifying pressure on Medicaid budgets. A 2023 study estimated that more than a quarter of gene therapy spending would come from Medicaid in the coming years, amounting to more than $5 billion annually. The Innovation Center’s CGT Access Model offers a structure similar to BALANCE, including standardized outcomes-based contracting and performance tracking. States that opt into the model can use the CGT Access Model’s framework for outcomes-based payment and care coordination, rather than developing standalone arrangements for each therapy from scratch. Initially focused on sickle cell disease, the model is designed to scale as more CGTs enter the market— offering a mechanism to align payment with outcomes.
What States Can Do Now: Medicaid Pharmacy Strategies for Today
While federal models offer promising innovations, states already have many of the tools needed to build more sustainable Medicaid pharmacy programs. The steps below highlight practical, near-term actions to strengthen oversight, improve predictability, and prepare Medicaid programs for emerging drug breakthroughs.
Optimize existing programs. States can build on proven strategies such as preferred drug list management, including strategic product (preferred and non-preferred) placement to maximize rebates, and contracting approaches like multi-state purchasing pools and outcomes-based agreements. Investments in medication adherence, closing care gaps, and preventive medication use can also help avoid downstream costs.
Strengthen pharmacy benefit oversight through administrative redesign. Because most Medicaid services are delivered through managed care organizations (MCOs), pharmacy benefits are typically carved into MCO contracts and administered by third-party pharmacy benefit managers (PBMs). While this model offers administrative simplicity, it can limit state visibility into drug costs and utilization. In response, states are reevaluating program design to increase oversight. This can include carving pharmacy benefits out of the MCOs, aligning coverage rules across fee-for-service and managed care through unified preferred drug list, or other arrangements that improve transparency. In 2022, Ohio replaced plan-run PBMs entirely with a single, state-run PBM, which generated an estimated $140 million in savings in its first two years. These changes can enhance pharmacy cost predictability, align drug coverage with policy goals, and ensure that PBMs function as vendors — not profit-drivers — within Medicaid.
Build out pharmacy data infrastructure. States can strengthen their ability to anticipate and manage pharmacy spending by investing in data systems that link drug utilization, outcomes, rebates, and total cost of care. Enhanced analytics and forecasting support more proactive decision-making around benefit design, contracting, and care management, while clarifying pharmacy’s role in total cost of care. Massachusetts stands out for integrating these strategies into a unified, data-driven model. Following 2019 legislation authorizing direct negotiation with manufacturers, MassHealth combines utilization analytics, rebate data, and outcomes-based contracts with a formal value-assessment process and reporting requirements for a comprehensive “all-of-the-above” approach. The state also runs an Office of Pharmaceutical Policy and Analysis through the Massachusetts Health Policy Commission, which advises MassHealth in negotiations. States participating in the Innovation Center’s pharmacy-related models can also benefit from early investment in evaluation and readiness planning, enabling more informed participation and supporting financial sustainability.
Managing the Next Wave of Innovation
The pace of pharmaceutical innovation is advancing faster than the systems designed to manage it. But by strengthening oversight, modernizing program design, and investing in data and integration, Medicaid programs can better respond to today’s pressures while preparing for what comes next. These steps can help states sustain access, control costs, and more fully capture the value of pharmaceutical innovation.
