U.S. Department of Health and Human Services 
 
Office of Inspector General 
 
 
 
 
 
 
 
States Could Do More To 
Oversee Spending and 
Contain Medicaid Costs for 
Specialty Drugs  
 
 
Suzanne Murrin 
Deputy Inspector General 
December 2020, OEI-03-17-00430  U.S. Department of Health and Human Services 
 
O ffice of Inspector General 
 
Report in Brief 
 
Dec ember 2020, OEI-03-17-00430 
States Could Do More To Oversee Spending and 
Why OIG Did This Review 
Recent trends have shown that a  Contain Medicaid Costs for Specialty Drugs  
small number of drugs account for a 
What OIG Found 
disproportionately large share of  Key Takeaway 
No standard definition of specialty drugs exists in 
Medicaid spending.  This subset of 
As more expensive  Medicaid.  Overall, State Medicaid programsFFS 
drugs, often referred to as specialty 
drugs, is frequently defined as  specialty drugs enter the  programs and Medicaid MCOsused over 100 distinct 
market, CMS and States 
high-cost drugs and/or drugs that  criteria to categorize thousands of drugs as specialty 
may not be using all 
may require special handling.  Each  drugs.  While most Medicaid MCOs chose to 
available tools to contain 
State may define and pay for these  categorize certain drugs as specialty drugs, most State 
rising expenditures for 
expensive drugs differently, which  FFS programs did not.  Additionally, about half of 
specialty drugs in their 
potentially leads to some States  these drugs had no Medicaid reimbursement data 
Medicaid programs. 
paying more than others.  States may  reported by States.  This may mean that Medicaid 
also categorize drugs as specialty  programs that choose to categorize drugs as specialty drugs are not updating or 
drugs as part of a strategy to mitigate  proactively managing their lists of these drugs. 
and control the costs associated with 
these drugs.    States reported limited oversight of their Medicaid MCOs management of 
In addition to State fee-for-service  specialty drug categorization and spending.  Twenty-four States reported that they 
(FFS) programs, Medicaid managed  were not aware of all the cost-management strategies their MCOs implemented to 
care organizations (MCOs) provide  contain specialty drug spending.  Because Medicaid MCOs are responsible for the 
coverage for health care services,  majority of Medicaid prescription drug reimbursement, a lack of cost containment 
including prescription drug  by MCOs can increase Medicaid expenditures in subsequent years, as States base 
coverage, to beneficiaries and are  MCO capitated payment rates on costs and utilization from previous years. 
responsible for managing utilization 
and medical costs.  Given the high  States also may be limited in their ability to set accurate reimbursement for 
costs of some specialty drugs, as  specialty drugs.  The Centers for Medicare & Medicaid Services (CMS) conducts 
well as the substantial role of  the national average drug acquisition cost (NADAC) survey to collect what 
Medicaid MCOs, reviewing how  pharmacies actually pay for drugs.  This is a tool States can use to set accurate 
programs categorize and reimburse 
reimbursement amounts.  However, this survey does not include acquisition cost 
for these drugs is important to 
data from specialty or mail order pharmacies.  As a result, 60 percent of drugs 
ensuring Medicaids fiscal integrity. 
categorized as specialty drugs with Medicaid reimbursement in 2018 did not have 
NADAC data available. 
How OIG Did This Review 
We surveyed 51 State Medicaid  What OIG Recommends  
Agencies to determine (1) whether and  We recommend that CMS work with States to expand alternative reimbursement 
how States categorized specialty drugs  models.  However, given the tremendous variation in the definition of specialty 
in their Medicaid programs; (2) the  drugs in Medicaid and the fact that most State FFS programs do not rely on this 
extent to which States conducted  categorization, we recommend that CMS work with States to address high-cost 
oversight of how their Medicaid MCOs 
drugs, regardless of their categorization.  In addition, we recommend that 
categorize specialty drug and 
CMS provide States with acquisition cost data for a wider range of specialty drugs.  
reimburse for them; and (3) whether 
We also recommend that CMS collaborate with States to conduct greater 
States implemented cost-management 
oversight of Medicaid MCOs management of specialty drugs, which could include 
strategies to control spending for 
a review of contract language that allows States to obtain requested information 
specialty drugs.  In addition, we 
on specialty drug categorizations, specialty drug reimbursement methodologies, 
obtained Medicaid reimbursement 
and cost-management strategies from the MCOs.  CMS concurred with our first 
data to compare reimbursement for 
and third recommendations.  CMS did not concur with our second 
drugs that were categorized as 
recommendation.  
specialty drugs across Medicaid 
   
programs.   
 
TABLE OF CONTENTS 
 
 
 
BACKGROUND  1 
Methodology  4 
FINDINGS  5 
Medicaid programs used a wide range of criteria to categorize thousands of drugs as   5 
specialty drugs 
Medicaid programs reimbursed $36 billion in 2018 for the small percentage of specialty   7 
drugs that had reimbursement data available  
Many States expressed concerns about the coverage of and reimbursement for   8 
specialty drugs  
States have limited oversight of their Medicaid MCOs management of specialty drug  11 
categorization and spending  
State FFS programs typically use the same cost-management strategies for specialty drugs as  12 
for nonspecialty drugs; few had efforts targeted specifically at specialty drugs 
RECOMMENDATIONS  15 
CMS should work with States to expand alternative reimbursement models to address the  15 
rising costs for drugs often categorized as specialty drugs 
CMS should provide States with acquisition cost data for a wider range of specialty drugs  16 
CMS should collaborate with States to conduct greater oversight of Medicaid MCOs  16 
management of specialty drugs; this oversight could include a review of contract language 
that allows States to obtain requested information on specialty drug categorizations, specialty 
drug reimbursement methodologies, and cost-management strategies 
AGENCY COMMENTS AND OIG RESPONSE  17 
DETAILED METHODOLOGY   18 
APPENDICES  21 
A.  Criteria that States used to categorize specialty drugs  21 
B.  Cost-management strategies for specialty drugs  28 
C.  Agency Comments  31 
ACKNOWLEDGMENTS AND CONTACT  33 
ABOUT THE OFFICE OF INSPECTOR GENERAL  34 
 
   
BACKGROUND 
 
 
Objective 
To determine how State Medicaid fee-for-service (FFS) programs and Medicaid 
managed care organizations (MCOs) categorize and contain costs for specialty 
drugs. 
 
Medicaid does not have a standard definition of specialty drugs.  Therefore, each 
State Medicaid FFS program and each Medicaid MCO (hereafter referred to 
collectively as Medicaid programs) may categorize these drugs differently, set a 
different reimbursement methodology, and implement different cost-management 
strategies for these drugs.  Given the high cost of some specialty drugs, as well as the 
substantial role of MCOs in Medicaid, reviewing how States and their MCOs 
categorize these drugs and reimburse for them is important to ensuring Medicaids 
fiscal integrity.  Further, this review of Medicaid programs reimbursement 
methodologies and cost-management strategies can inform State Medicaid programs 
about additional steps they can take to control rising costs for specialty drugs.   
Specialty Drugs: Growing Concerns Over Categorization and 
Costs 
Because Medicaid does not have a standardized method to categorize specialty 
drugs, each Medicaid program may categorize these drugs differently or not 
categorize them at all.1  However, drugs typically considered specialty drugs 
frequently share several characteristics.  For example, they often:  
  are expensive;  
  are used to treat rare, complex, or chronic conditions such as HIV, hepatitis C, 
hemophilia, multiple sclerosis, or certain cancers;  
  need special handling (e.g., they must be stored at a specific temperature); 
  are administered by clinical professionals via injection or infusion; and/or  
  are dispensed through specialty pharmacies rather than retail community 
pharmacies.   
States may categorize drugs as specialty drugs as part of a strategy to mitigate and 
control the costs associated with these drugs.  Because each State may define and pay 
_____________________________________________________________________________________________________________________________ 
1 This stands in contrast to Medicare Part D, where Part D plans may include a specialty tier for certain 
high-cost drugs.  Currently, a drug must cost at least $670 per month for inclusion on a plans specialty 
tier. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Background | 1  for specialty drugs differently, this potentially leads to some States paying more than 
others. 
In spite of the various methods used to categorize specialty drugs, recent studies 
have shown that drugs sharing these characteristics account for a large percentage of 
drug spending growth.2  In 2019, the Congressional Budget Office reported that 
Medicaid spending on specialty drugs increased from 25 percent to 35 percent of 
total drug spending from 2010 to 2015.3  These trends will likely continue as research 
indicates that specialty drug use will continue to rise.   
Medicaid Prescription Drug Coverage and Reimbursement 
Currently, all 50 States and the District of Columbia (51 States) offer prescription drug 
coverage as part of their Medicaid benefit packages.  For their drugs (including 
specialty drugs) to be eligible for Medicaid reimbursement, drug manufacturers must 
enter into rebate agreements and pay rebates to States and the Federal government 
that offset the cost of their drugs.4  Medicaid reimbursed $63.4 billion for prescription 
drugs in 2018.5   
Each State has the flexibility to administer its Medicaid program within broad Federal 
guidelines, resulting in various combinations of health care delivery and payment 
systems across States.  Generally, States offer Medicaid servicesincluding 
prescription drugs(1) through the FFS model, (2) by contracting with MCOs to 
provide Medicaid coverage to beneficiaries, or (3) by a combination of both.6  In the 
traditional FFS model, States directly reimburse pharmacies for covered prescription 
drugs each time an enrollee obtains a covered drug.  Under the managed care model, 
States prospectively pay Medicaid MCOs a fixed monthly amount, called a capitated 
rate, per Medicaid beneficiary.  The capitated rate is intended to cover all or most 
contracted services that a beneficiary receives during a specified time.7  Medicaid 
MCOs, in turn, reimburse pharmacies for covered prescription drugs.   
As of September 2018, 35 States reported that they contracted with Medicaid MCOs 
to provide prescription drug coverage.  Medicaid MCOs are now responsible for the 
_____________________________________________________________________________________________________________________________ 
2 Express Scripts.  2018 Drug Trend Report.  Accessed at https://my.express-scripts.com/rs/809-VGG-
836/images/Express%20Scripts%202018%20Drug%20Trend%20Report.pdf on February 20, 2020.  
3 The Congressional Budget Office used a proprietary list of specialty drugs provided by IQVIA (a health 
care data research company) to conduct its analysis.  Congressional Budget Office, Prices for and 
Spending on Specialty Drugs in Medicare Part D and Medicaid: An In-Depth Analysis.  March 2019.  
Accessed at http://www.cbo.gov/publication/55011 on February 20, 2020. 
4 Section 1927(a) of the Social Security Act. 
5 This reimbursement total does not account for drugs for which the payment data were suppressed.  
This total also does not account for Medicaid rebates. 
6 Some State FFS programs and Medicaid MCOs contract with pharmacy benefit managers (PBMs) to 
negotiate reimbursement amounts and manage their prescription drug benefits.    
7 CMS, Managed Care, accessed at https://www.medicaid.gov/medicaid/managed-care/index.html on 
December 4, 2019. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Background | 2  majority of Medicaid reimbursement and enrollment.  In fact, in 2018 Medicaid MCOs 
reimbursed $37.7 billion for prescription drugsapproximately 60 percent of total 
Medicaid drug expenditures.  Therefore, Medicaid MCOs play a large role in reducing 
costs and managing utilization of Medicaid services, including prescription drugs.   
Any increases in costs or utilization for medical services, including prescription drugs, 
will generally lead to higher capitated rates for MCOs in subsequent years.  This is 
because MCOs capitated rates are calculated with utilization and pricing data from 
previous years, using actual experiences of the Medicaid (or similar) population in 
accordance with generally accepted actuarial practices and principles.  As part of its 
oversight, the Centers for Medicare & Medicaid Services (CMS) must review the 
methods and data used to set MCO capitated rates, as well as each contract between 
a State and its Medicaid MCOs, to ensure compliance with Federal requirements and 
CMS guidance.8, 9    
Estimating Pharmacy Reimbursement Amounts  
State FFS programs and Medicaid MCOs may use different methods to estimate drug 
reimbursement amounts.  State FFS programs generally base reimbursement for a 
drugas required by Federal regulationon its actual acquisition cost, which 
represents the actual price that pharmacies pay to acquire the drug.10, 11  States have 
the flexibility to use various benchmark prices and data sources to establish a 
reimbursement methodology on the basis of actual acquisition cost.  In contrast to 
State FFS programs, Medicaid MCOs are not required to reimburse for drugs based 
on actual acquisition cost.  Instead, CMS allows Medicaid MCOs the flexibility to 
reimburse at the levels necessary to achieve a network of providers to ensure access 
to care for each MCOs Medicaid enrollees.12  
National average drug acquisition cost (NADAC) data.  CMS conducts a monthly 
national survey of acquisition costs at retail community pharmacies to assist States in 
setting reimbursement amounts on the basis of actual acquisition cost.  CMS uses 
these data to calculate a NADAC for each drug and makes this cost data available to 
the public.  However, the reimbursement amounts for specialty pharmacies are not 
included in NADAC calculations because specialty pharmacies are not considered 
retail community pharmacies.   
_____________________________________________________________________________________________________________________________ 
8 42 CFR  438.3 
9 CMS, State Guide to CMS Criteria for Medicaid Managed Care Contract Review and Approval, accessed at 
https://www.medicaid.gov/medicaid/downloads/mce-checklist-state-user-guide.pdf on February 24, 
2020. 
10 42 CFR  447.502.  Actual acquisition costs include the ingredient cost of the drug only.  States also 
may provide the pharmacy with a dispensing fee for each prescription.      
11 CMS, Implementation of the Covered Outpatient Drug Final Regulation Provisions Regarding 
Reimbursement for Covered Outpatient Drugs in the Medicaid Program, accessed at 
https://www.medicaid.gov/federal-policy-guidance/downloads/smd16001.pdf on February 24, 2020. 
12 81 Fed. Reg. 5170, 5272-5273 (Feb. 1, 2016). 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Background | 3  Methodology 
State Survey and Data Request 
We sent an online survey to 51 State Medicaid agencies (States) to request 
information about their coverage of and reimbursement for specialty drugs.  We 
received responses from all 51 States.  We reviewed these States responses to 
determine the number of State FFS programs and Medicaid MCOs that categorized 
any drugs as specialty drugs.  We then identified and compared the criteria that each 
program used to categorize drugs as specialty drugs.  We also reviewed States 
responses to determine whether the cost-management strategies implemented in 
each State were associated specifically with specialty drugs.   
For the 35 States that contracted with Medicaid MCOs to provide prescription drug 
coverage, we analyzed States responses about (1) the extent to which they reviewed 
and conducted oversight of MCOs coverage and reimbursement of specialty drugs.  
(2) whether and how specialty drugs affect MCO capitation rates; and (3) challenges 
they may have faced in obtaining information about specialty drugs from their MCOs. 
For Medicaid programs that categorized any drugs as specialty drugs, we reviewed 
the 11-digit national drug codes (NDCs)13 and drug names they provided for the 
drugs they categorized as specialty drugs.14  We also determined the number of NDCs 
categorized as specialty drugs in at least one Medicaid program and the number of 
NDCs categorized as specialty drugs by at least half of Medicaid programs. 
Reimbursement and Utilization Data 
We downloaded Medicaid State Drug Utilization data from CMSs website to calculate 
total 2018 Medicaid reimbursement for any NDC that was categorized as a specialty 
drug by State FFS programs or Medicaid MCOs.  We also calculated total 2018 
Medicaid reimbursement for the NDCs categorized as specialty drugs by at least half 
of the State FFS programs and/or Medicaid MCOs.  Finally, we compared the State 
FFS program average unit reimbursement amounts to the Medicaid MCO average 
unit reimbursement amounts for each of the NDCs categorized as specialty drugs by 
State FFS programs and by at least half of MCOs that categorized specialty drugs 
within that same State.      
A detailed methodology is provided on page 18. 
Standards 
We conducted this study in accordance with the Quality Standards for Inspection and 
Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency.  
_____________________________________________________________________________________________________________________________ 
13 An NDC is a unique identifier assigned to each drug product.  Each NDC represents a distinct labeler, 
product, and package size. 
14 A drug name can be with associated with multiple NDCs (e.g., when there are multiple strengths 
and/or package sizes of the same drug). 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Background | 4   
FINDINGS 
 
Medicaid programs used a wide range of criteria to categorize 
thousands of drugs as specialty drugs 
Medicaid programs considered over 100 distinct criteria to categorize thousands of 
drugs as specialty drugs.  While cost was a common criterion used to categorize 
specialty drugs, States also broadly considered the types of conditions treated; 
methods of administration; and the level of followup or maintenance required.  In 
fact, individual Medicaid programs used between 1 and 19 distinct criteria when 
categorizing specialty drugs.  In certain programs, a drug had to meet a minimum of 
two or more specific criteriasuch as requiring special handing, treating rare 
conditions, and/or having high costsfor a program to categorize it as a specialty 
drug.   
Across Medicaid programs, there was variation in how similar criteria were applied.  
For example, of the Medicaid programs that used high cost to categorize a drug as a 
specialty drug, the threshold for what was considered high cost ranged from 
$500 per month to $5,000 per month.  Appendix A provides more information about 
the wide range of criteria used to categorize drugs as specialty drugs in Medicaid.  
Most Medicaid MCOs chose to categorize certain drugs as 
specialty drugs while most FFS programs did not 
Although 86 percent of Medicaid MCOs (207 of 242) established criteria to categorize 
drugs as specialty drugs, only 14 of the 51 State FFS programs (27 percent) 
categorized any drugs as specialty drugs.15   
Among the 37 States that did not categorize specialty drugs in their FFS programs, 
half had considered doing so at some point.  However, some States reported that 
they could not decide on a definition or criteria to distinguish these drugs from other 
outpatient drugs.  One State said that it: briefly considered categorizing certain drugs 
as specialty drugs multiple times... [but] we did not complete a full analysis because 
we did not see immediate value to doing 
so.  Another State responded that it would  There is no national definition of a 
be beneficial for consistency across  specialty drug and it is therefore 
Medicaid programs if CMS defined specialty  difficult to create artificial parameters in 
an attempt to classify these 
drugs, and an additional State said that it 
medications.  State Medicaid Agency 
was awaiting guidance from CMS regarding 
categorization of specialty drugs. 
_____________________________________________________________________________________________________________________________ 
15 Of the 35 States that reported they contracted with Medicaid MCOs to provide prescription drug 
benefits, 32 States had at least 1 Medicaid MCO that categorized drugs as specialty drugs. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 5  There was minimal overlap of specialty drugs across Medicaid 
programs 
The substantial number of criteria used to categorize specialty drugs resulted in a 
total of 15,978 NDCs (associated with 1,614 drug names) being categorized as 
specialty drugs across Medicaid programs.  However, none of these 15,978 NDCs 
were categorized as a specialty 
Exhibit 1: Only 9 percent of NDCs were categorized 
drug by every Medicaid 
as specialty drugs by at least half of Medicaid 
programs.  program that categorized 
specialty drugs.  Further, only 
91%
9 percent of these NDCs were 
categorized as specialty drugs 
by at least half of the Medicaid 
programs that provided us 
9%
with their specialty drug NDCs, 
as shown in Exhibit 1.  In 
Categorized as specialty drugs Categorized as specialty drugs
by at least half of Medicaid by less than half of Medicaid addition, 37 percent of these 
programs that categorized programs that categorized
15,978 NDCs were categorized 
  these drugs these drugs
as specialty drugs by only 
Source: OIG analysis of data from survey of State Medicaid   
1 Medicaid program.   
programs, 2019. 
Fifty-seven percent of drugs categorized as specialty drugs had 
no reimbursement data reported by States, an indication that 
Medicaid programs lists of specialty drugs may be out of date    
Of the 15,978 NDCs that were categorized as specialty drugs by at least 1 Medicaid 
program, 57.3 percent (9,152 NDCs) had no reimbursement data listed in the 
2018 Medicaid reimbursement data file.  Because of very low utilization, CMS 
suppressed all 2018 reimbursement data for an additional 10.2 percent of NDCs that 
were categorized as specialty drugs.  (CMS suppresses NDC-level data when there are 
10 or fewer prescriptions dispensed for a specific NDC.)  Reimbursement data were 
available for 32.5 percent of NDCs categorized as specialty drugs by at least 
1 Medicaid program.     
There are indications that many of the specialty drug categorizations provided by 
States are out-of-date, which may explain why there is a lack of reimbursement data 
for these drugs.  Ninety percent (8,253 NDCs) of the 9,152 NDCs that did not have 
reimbursement data are (1) not listed with the Food and Drug Administration (FDA) 
(5,957 NDCs), (2) not currently available for purchase (1,057 NDCs) or (3) not included 
on the Medicaid drug product file (1,239 NDCs), as shown in Exhibit 2.   
This calls into question the quality of the data Medicaid programs provide because 
such a large number of these drugs are not found in frequently used databases or 
available for purchase.  Specifically, drug manufacturers are generally required to 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 6  provide FDA with a list of all the drugs that 
Exhibit 2: Of the NDCs with no 
they manufacture, repackage, or relabel for  Medicaid reimbursement, a total of 90 
commercial distribution.16 They also identify  percent were not listed with FDA, not 
drugs that are no longer available for  considered active drugs in Medicaid, 
purchase.  Manufacturers that participate in  or not available for sale.  
the Medicaid drug rebate program also report 
drug product data for all active drugs.   
This group of 8,253 NDCs accounted for a 
substantial majority of the NDCs that did not 
have reimbursement data, and for over half 
(52 percent) of all NDCs that were categorized 
as a specialty drug by at least 1 Medicaid 
program.  If Medicaid programs do not  Source: OIG analysis of State Medicaid survey 
proactively maintain these lists, it could result  data, 2019. 
in their using out-of-date information to manage specialty drug costs and utilization. 
Medicaid programs reimbursed $36 billion in 2018 for the small 
percentage of specialty drugs with reimbursement data 
available  
Medicaid reimbursed at least $36 billion in 2018 for NDCs that were categorized as 
specialty drugs by at least 1 Medicaid program.  This represents reimbursement for 
only 5,191 of the 15,978 NDCs (associated with 1,189 drug names) that were 
categorized as specialty drugs by at least one Medicaid program.  As discussed 
previously, States did not report any Medicaid reimbursement in 2018 for a 
substantial number of the 15,978 NDCs categorized as specialty drugs by at least one 
Medicaid program.   
Medicaid MCOs were responsible for the majority of total reimbursement for these 
five thousand NDCs ($21.2 billion, or 59 percent).  For NDCs categorized as specialty 
drugs by at least half of Medicaid programsi.e., half of all State FFS programs 
and/or Medicaid MCOs that categorize drugs as specialty drugsreimbursement 
totaled $19.6 billion in 2018, or over one-quarter of Medicaids total drug 
reimbursement in that year.   
Medicaid reimbursed $7.8 billion for 10 specialty drug names with the highest 
reimbursement, as shown in Exhibit 3.  Reimbursement for these 10 drugs constituted 
12 percent of total Medicaid reimbursement for all drugs in 2018.  
 
 
_____________________________________________________________________________________________________________________________ 
16 21 CFR  207.41. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 7  Exhibit 3: Top 10 specialty drugs with the highest reimbursement in 2018 
Medicaid 
Drug Name  Condition(s) Treated 
Reimbursement 
Certain types of arthritis, 
1  Humira   $1,776,425,562 
Crohns disease 
2  Mavyret  Hepatitis C   $967,361,356 
3  Genvoya  HIV   $881,210,823 
4  Invega Sustenna  Schizophrenia   $844,345,580 
5  Suboxone  Opioid dependence   $765,707,604 
6  Enbrel  Certain types of arthritis   $635,395,585 
7  Triumeq  HIV   $584,888,272 
8  Epclusa  Hepatitis C   $492,967,443 
9  Truvada  HIV   $450,666,578 
10  Lantus Solostar  Diabetes   $444,043,823 
Total  $7,843,012,627a
Source:  OIG analysis of data from survey of State Medicaid programs and Medicaid drug utilization data, 2019. 
a Because of rounding, individual drug reimbursement does not sum to the total.
Many States expressed concerns about the coverage of and 
reimbursement for specialty drugs 
Many States (33) expressed ongoing concerns related to the coverage of and 
reimbursement for drugs often considered specialty drugs in their Medicaid 
programs.  These States concerns included the high costs for these drugs and their 
effects on State budgets.  For example, a number of States reported concerns about 
reimbursement for new chimeric antigen receptor T-cells (CAR-T) drugs, which 
provide for individualized cancer treatments.  CAR-T 
Inpatient hospitals report that [CAR-T]  therapy may cost up to $475,000.  Further, CAR-T 
costs are currently not adequately covered  therapy can cause serious side effects that require 
under the inpatient hospital reimbursement  hospitalization.  As a result, total costs can exceed 
methodology.  State Medicaid Agency  $1 million per beneficiary.  Because CAR-T therapy can 
require both 
inpatient and outpatient care, four States noted 
We feel these drugs are often 
concerns about how to reimburse for CAR-T 
unfairly priced without justification. 
therapy under these different settings.17  One 
State Medicaid Agency 
_____________________________________________________________________________________________________________________________ 
17 In the preamble to its final rule on the Medicare hospital inpatient prospective payment system, CMS 
indicated that it established a new diagnosis-related group code for CAR-T immunotherapy.  Because this 
change occurred after our data collection, we do not know whether this change would address any of the 
States concerns.  See 85 Fed. Reg. 58432 (September 18, 2020).  
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 8  State commented that it does not have an approved method to sufficiently reimburse 
for these therapies using the existing inpatient bundled rate, and it must create a new 
model that reimburses the manufacturer or hospital.  
Four States also reported concerns related to coverage of specialty drugs under their 
respective Medicaid programs.  Because States generally must cover all drugs from 
manufacturers that have a Medicaid rebate agreement, States noted that they have 
no choice in covering drugs, even those that they believe may have limited 
effectiveness or questionable safety.  One State reported that it was concerned that 
FDAs accelerated approval process results in specialty drugs available for purchase 
that may have limited safety and effectiveness.   
Medicaid programs do not have NADAC data to help set 
reasonable reimbursement rates for many drugs categorized as 
specialty drugs  
State FFS programs are required to set reimbursement for drugs based on actual 
acquisition cost, which represents the actual price that pharmacies pay to acquire the 
drugs.  States may use benchmark prices, such as NADAC, to establish their 
reimbursement amounts based on acquisition costs.  The NADAC was developed to 
provide States with a better estimatebased on actual drug purchasesof prices 
paid by pharmacies.  Compared to other acquisition-cost or pricing benchmarks, the 
NADAC has greater accuracy and 
transparency in how drug acquisition prices 
It would be great to have a NADAC for 
are established, and it is generally more 
resistant to manipulation.18  However, the  specialty drugs.  Being that specialty drugs 
represent an increasing percentage of 
NADAC survey does not include acquisition 
drug spend[ing], we would like a better 
cost data from specialty or mail-order 
mechanism to establish lower 
pharmacies.   
reimbursement.  State Medicaid Agency 
Many of the drugs with Medicaid 
reimbursement that were categorized as specialty drugs across Medicaid programs 
were not included in the NADAC survey data that States often use to set 
reimbursement for specialty drugs, possibly because this survey does not include 
specialty pharmacies or mail-order pharmacies.  Although 64 percent of State FFS 
programs reported using NADAC as one method to set reimbursement for specialty 
drugs, 60 percent of NDCs for specialty drugs with Medicaid reimbursement in 2018 
did not have NADAC data.19  Medicaid reimbursed $14 billion in 2018 for 
3,123 specialty NDCs that did not have a NADAC price available.  As a result, States 
_____________________________________________________________________________________________________________________________ 
18 CMS, Methodology for Calculating the National Average Drug Acquisition Cost (NADAC) for Medicaid 
Covered Outpatient Drugs, November 2013.  Accessed at https://www.medicaid.gov/medicaid-chip-
program-information/by-topics/prescription-drugs/ful-nadac-downloads/nadacmethodology.pdf on 
March 26, 2020. 
19 Of the top 10 drug names listed in Exhibit 3, each drug name had at least 1 NDC with a NADAC price.  
However, 40 percent of the NDCs associated with these 10 drug names did not have a NADAC price. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 9  cannot use this publicly available data as a tool to set reimbursement amounts for 
many specialty drugs using acquisition costs.  
While State FFS programs set reimbursement methodologies based on actual 
acquisition costs, most Medicaid MCOs (81 percent) reported that they set 
reimbursement for specialty drugs using discounted average wholesale price (AWP) at 
specialty pharmacies.  AWP is an estimate of the price that retail pharmacies pay to 
wholesalers for a drug and is not based on actual acquisition costs.  Medicaid MCOs, 
unlike FFS programs, are not required to reimburse for drugs based on acquisition 
costs.  CMS allows Medicaid MCOs this flexibility to ensure that each enrollee in 
a Medicaid MCO has adequate access to a network of providers.   
States report that rising specialty drug costs affect capitation 
payments to Medicaid MCOs 
Because States typically base their capitation rates on utilization and spending from 
previous years, any increase in reimbursement for specialty drugs could lead to higher 
capitation rates for all beneficiaries enrolled in Medicaid MCOs.  Therefore, as more 
expensive drugs continue to enter the market, utilization of these drugs can increase 
long-term spending via Medicaid MCO capitation payments.   
Nineteen States that contract with Medicaid 
Effectively reimbursing health plans for 
MCOs responded that specialty drug costs 
high-cost/low-volume therapies in a capitated rate 
methodology while, at the same time, reacting to  affect MCO capitation payments.  For 
new drug treatments and market changes in price  example, one State said that the increase in 
has proved a formidable task for the State and its  specialty drug costs and utilization results in 
actuary.  State Medicaid Agency  significant upward pressure on the 
prescription drugs portion of the capitation 
rates, especially in comparison to other cost drivers.  Additionally, 10 States said that 
they provide Medicaid MCOs with supplemental payments to help cover the costs of 
specialty drugs.   
Medicaid MCO reimbursement for specialty drugs was often higher than 
reimbursement by State FFS programs 
In the 6 States where the FFS program and at least 50 percent of Medicaid MCOs 
both categorized a drug as a specialty drug, MCOs average unit reimbursement was 
often higher than the average unit reimbursement for the corresponding State FFS 
program.   
 
 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 10  As shown in Exhibit 4, MCO reimbursement was higher than FFS reimbursement for 
63 percent of instances for which we could compare reimbursement within a State.20 
Exhibit 4: MCO reimbursement was higher than FFS reimbursement in 
63 percent of instances in which a drug was categorized as a specialty drug 
in both programs in a State. 
   
 
MCO reimbursement was higher
 
FFS reimbursement was higher  
 
 
Source: OIG analysis of data from survey of State Medicaid programs, 2019. 
Note: there were 252 drug comparisons included in this analysis. 
States have limited oversight of Medicaid MCOs management 
of specialty drug categorization and spending 
In spite of the concerns that many States expressed regarding specialty drugs, a 
majority of them did not take action to conduct oversight of MCO spending on these 
drugs.  For example, a majority of States were unaware of which drugs their respective 
MCOs considered as specialty drugs.  In fact, only five States contractually required 
their Medicaid MCOs to provide the State with their specialty drug lists, and only 
seven States performed any analyses or reviews of their Medicaid MCOs specialty 
drug lists.  Nearly one-quarter of the States (7 of 32) with Medicaid MCO(s) that 
categorized specialty drugs were not aware of any criteria that their Medicaid MCOs 
used to categorize these drugs.  These oversight tools could assist States in ensuring 
that their Medicaid MCOs pay appropriately for specialty drugs. 
States also reported challenges in accessing data from their MCOs, and these 
challenges could inhibit a States ability to conduct robust and effective oversight.  
Six States noted that they experienced barriers to reviewing at least some of their 
MCOs specialty drug categorizations or specialty drug lists.  One State said an MCO 
eventually provided a list, but at first the MCO refused as the MCO (or its pharmacy 
benefit manager (PBM)) considered it to be proprietary.  Another State reported that 
_____________________________________________________________________________________________________________________________ 
20 There were 177 NDCs that met the criteria for our analysisi.e., the NDC was categorized as a 
specialty drug by both the State FFS program and by at least 50 percent of Medicaid MCOs that 
categorized specialty drugs in that State, and both programs had reimbursement data available.  Because 
some of these NDCs had reimbursement in multiple States, this resulted in 252 individual comparisons of 
average unit reimbursement amounts for State FFS programs to average unit reimbursement amounts 
for Medicaid MCOs. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 11  managed care plans did not submit reimbursement rates for individual drugs because 
of PBM confidentiality.  
Finally, 19 of the 32 States with MCOs that categorized specialty drugs responded 
that they did not know whether their MCOs reimbursed specialty drugs differently 
from other outpatient drugs, even though States must review their Medicaid MCO 
contracts.  One of these 32 States said its Medicaid MCOs used the same 
reimbursement methodologies for both specialty and nonspecialty drugs.  The 
remaining 12 States reported that at least some of their Medicaid MCOs used 
different reimbursement methodologies or dispensing fees for specialty drugs than 
for other outpatient drugs.   
Three-quarters of States with Medicaid MCOs that categorized 
specialty drugs did not know all the specific cost-management 
strategies that their Medicaid MCOs implemented for these drugs   
If States are not effectively overseeing their Medicaid MCOs cost-management 
strategies, they cannot ensure that Medicaid MCOs are taking all appropriate actions 
to control expenditures for these drugs.  Many States reported they were unaware of 
whether their MCOs implemented strategies to control specialty drug costs.  
Specifically, 24 of the 32 States with Medicaid MCOs that categorized specialty drugs 
reported they did not know all the cost-management strategies their Medicaid MCOs 
implemented to control specialty drug spending.   
State FFS programs typically use the same cost-management 
strategies for specialty drugs as for nonspecialty drugs; few had 
efforts targeted specifically at specialty drugs 
While cost-management strategies can be important tools for reducing State FFS 
program expenditures for specialty drugs, States reported having cost-management 
strategies that specifically targeted specialty drugs in only 2 of the 14 State FFS 
programs that categorized these drugs.  One of these two State FFS programs has a 
waiver to negotiate prices with a limited number of preferred specialty pharmacies.  
The other State FFS program implemented a care management program for high-cost 
drugs to optimize adherence and thereby improve patient outcomes and reduce 
medical spending.21   
While only a few States had cost-management strategies that specifically targeted 
drugs categorized as specialty drugs, all Medicaid programs implemented 
cost-management strategies for at least some outpatient drugs, as shown in Exhibit 5.  
_____________________________________________________________________________________________________________________________ 
21 According to CMS, it has approved proposals from nine States to allow them to implement            
value-based purchasing (VBP) models.  These models allow States to negotiate supplemental rebates 
with drug manufacturers using evidence and outcome-based measures.  In addition, CMS issued a 
proposed rule that would advance its efforts to support State flexibility to enter into innovative VBP 
arrangements with manufacturers.  See 85 Fed. Reg. 37286 (June 19, 2020).  
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 12  While these approaches are not always targeted specifically towards lowering the 
spending on specialty drugs, they may cover specialty drugs. 
Specific examples of how States implemented cost-management strategies for their 
specialty drugs include the following: 
  criteria for prior authorization were developed based on clinical studies and 
for patients where a drugs value had been observed; 
  preferred drug lists were developed based on drugs clinical superiority, brand 
preference, and rebate opportunity; and  
  a single preferred drug list applied to both the State FFS program and the 
States Medicaid MCOs.   
Exhibit 5: Cost-Management Strategies Commonly Used To Control Drug Costs 
Number of States  Number of States 
that implemented  that implemented 
Cost-management 
Description   strategy for   strategy specific 
strategy 
any outpatient  to specialty 
drugs  drugsa 
Provider must obtain 
Prior authorization  51  33 
preapproval before dispensing 
specific medications.  
Program limits the amount of a 
Quantity limits  51  31 
drug that it will cover during a 
specific time period.   
Select drugs receive preference 
Preferred drug lists   50  31 
over other medications within 
the same therapeutic class. 
Program negotiates additional 
Supplemental 
manufacturer rebates in return  49  28 
rebates 
for preferred status (see 
preferred drug lists). 
Beneficiary must try a cheaper 
Step therapy  drug (that also is medically  47  27 
indicated) before receiving a 
more expensive drug. 
Program sets maximum 
Maximum allowable  43  13 
reimbursement for a specified 
cost lists  
list of drugs. 
Source: OIG analysis of State survey data, 2019. 
a This column includes only the 38 States in which the FFS program or at least 1 Medicaid MCO categorized specialty drugs. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 13  Several States have implemented alternative payment policies to address the rising 
costs of drugs.  For example, Oklahoma became the first State to implement 
value-based rebate agreements for certain drugs, including specialty drugs, in its 
Medicaid drug program.22  In this particular model, the drug manufacturer pays 
higher rebates if a beneficiary taking its drug is hospitalized for conditions the drug is 
intended to treat.  This State reported: The cost management aspect [of value-based 
rebate contracts] is yet to be seen, but these will be very important when it comes to 
managing one-time gene therapies and other similar treatments.  In another effort to 
control drug costs, New York passed a cap on Medicaid drug spending that ties 
growth in drug spending to medical inflation.23   
Nearly all State FFS programs negotiate supplemental rebates to 
control Medicaid drug spending  
States and MCOs may negotiate supplemental rebates for outpatient drugs to reduce 
Medicaid drug spending.  Nearly all State FFS programs (13 of 14) that categorize 
drugs as specialty drugs negotiated supplemental rebates for specialty drugs.  In 
contrast, only 56 percent of States reported that at least some of their Medicaid 
MCOs negotiated supplemental rebates for specialty drugs.  In the remaining 
37 States that did not define specialty drugs in their FFS programs, 33 States 
(89 percent) implemented supplemental agreements for their outpatient drugs.  These 
rebates can provide significant savings for Medicaid programs and their beneficiaries. 
States attempted to shield beneficiaries from paying high 
out-of-pocket costs for any drugs, including specialty drugs 
States used different approaches to limit beneficiaries out-of-pocket costs.  While 
States are generally required to limit aggregate cost-sharing to 5 percent of a familys 
income, some States attempted to further shield beneficiaries from increased costs 
due to rising drug prices in their Medicaid programs by implementing cost-sharing 
caps.24  In fact, 20 States reported that their FFS programs and/or MCOs implemented 
cost-sharing caps or limits to prevent beneficiaries from having to pay expensive 
copayments or coinsurance for specialty drugs.  For example, some States reported 
that they do not have any cost-sharing requirements for any drugs for beneficiaries 
enrolled in their Medicaid programs.  Other States implemented caps on cost-sharing 
requirements, such as a $1 copayment or a $200 maximum on annual drug costs.  
_____________________________________________________________________________________________________________________________ 
22 The National Academy for State Health Policy (NASHP), Oklahoma Signs the Nations First State 
Medicaid Value-Based Contracts for Rx Drugs, Accessed at https://nashp.org/oklahoma-signs-first-
medicaid-value-based-contracts-for-rx-drugs/ on October 3, 2019. 
23 N.Y. Public Health Law, Article 2-A  280. 
24 42 CFR  447.56(f). 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Findings | 14   
RECOMMENDATIONS 
 
 
As specialty drugs continue to account for an increasing percentage of drug 
spending, it is important that CMS and States effectively employ all available tools 
and strategies to contain rising expenditures for specialty drugs in Medicaid.  
However, our findings indicate that despite concerns about high-cost drugs
including those drugs categorized as specialty drugsStates face challenges in 
containing these costs and in overseeing MCOs reimbursement for these drugs.  
States also reported challenges in their oversight of Medicaid MCOs management of 
specialty drug spending.  Specifically, 19 States were unaware of the differences in 
their Medicaid MCOs reimbursement methodologies for specialty drugs, and 
24 States reported they did not know all the cost-management strategies that their 
MCOs implemented to contain specialty drug spending.  In addition, we found that 
the average unit reimbursement for Medicaid MCOs was higher than the average unit 
reimbursement for State FFS programs in 63 percent of instances in which both 
program types categorized a drug as a specialty drug (and reimbursement data were 
available).  If Medicaid MCOswhich are responsible for the majority of 
reimbursement for prescription drugs in Medicaidare not appropriately containing 
specialty drug costs, this can increase long-term Medicaid expenditures, as MCO 
capitated payment rates are based on costs and utilization from previous years.   
Additionally, States may be limited in their ability to set accurate reimbursement for 
specialty drugs.  Sixty percent of drugs categorized as specialty drugs that had 
Medicaid reimbursement in 2018 did not have NADAC data available.  This means 
that State Medicaid programs do not have NADAC data to help set reasonable 
reimbursement rates for many specialty drugs. 
We recommend that CMS:   
Work with States to expand alternative reimbursement models 
to address the rising costs for drugs often categorized as 
specialty drugs  
Some States are already working with CMS to explore alternative reimbursement 
models that address increased spending for high-cost drugs.  For example, CMS has 
already approved in at least one State a value-based payment model that aims to 
lower drug costs.  Additional States may want to consider implementing similar 
value-based rebate agreements with drug manufacturers or developing        
maximum-allowable-cost lists to limit reimbursement for specialty drugs.  However, 
given the tremendous variation in the definition of specialty drugs in Medicaid, and  
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Recommendations | 15  the fact that most State FFS programs do not rely on this categorization, we 
recommend that CMS work with States to address high-cost drugs, regardless of their 
categorization. 
Provide States with acquisition cost data for a wider range of 
specialty drugs  
States reported difficulty in setting reimbursement rates for specialty drugs paid for 
by Medicaid FFS programs, and three out of five specialty drugs with reimbursement 
data did not have NADAC data available.  If CMS provided States with acquisition cost 
data for a wider range of specialty drugs covered by Medicaid, States may be able to 
more accurately set reimbursement rates and potentially reduce the inflated costs for 
specialty drugs.   
Collaborate with States to conduct greater oversight of 
Medicaid MCOs management of specialty drugs; this oversight 
could include a review of contract language that allows States 
to obtain requested information on specialty drug 
categorizations, specialty drug reimbursement methodologies, 
and cost-management strategies 
Although States pay Medicaid MCOs to serve beneficiaries, many States responded 
that they had limited knowledge of Medicaid MCOs activities related to specialty 
drugs.  Few States required Medicaid MCOs to provide lists of specialty drugs or 
performed any review of those lists.  In addition, some States noted difficulty in 
obtaining information regarding specialty drugs that was labeled proprietary or 
confidential by MCOs.  Given these difficulties, CMS should take steps (e.g., issuing 
guidance) that encourages States to strengthen their oversight of Medicaid MCOs 
specialty drug categorizations, reimbursement methodologies, and cost-management 
strategies.  This could include guidance to ensure that contracts with Medicaid MCOs 
provide States with access to information regarding specialty drugs covered by MCOs 
and dispensed to Medicaid beneficiaries.   
AGENCY COMMENTS AND OIG RESPONSE 
 
                                                                                                                                     
 
 
 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Recommendations | 16   
AGENCY COMMENTS AND OIG RESPONSE  
 
 
CMS concurred with the first and third recommendations but did not concur with the 
second recommendation.   
CMS concurred with our recommendation for it to expand alternative reimbursement 
models to address the rising costs for drugs often categorized as specialty drugs.  
CMS stated that it has taken several steps to support States in creating alternative 
reimbursement models.  Specifically, CMS approved proposals from nine States to 
implement value-based purchasing models.  CMS also cited a proposed rule that it 
has issued to assist other States in implementing similar models.       
CMS concurred with our recommendation for it to collaborate with States to conduct 
greater oversight of Medicaid MCOs management of specialty drugs.  CMS stated 
that it will take steps, e.g., issuing guidance, to encourage States to strengthen their 
oversight of their MCOs specialty drug categorizations, reimbursement 
methodologies, and cost management strategies.  These steps could include 
encouraging States to contractually require MCOs to provide States with access to 
information on covered specialty drugs.   
CMS did not concur with our recommendation for it to collect information about 
specialty pharmacy acquisition costs and provide these data to States.  CMS stated 
that it does not have clear statutory authority to conduct a nationwide survey of 
prices for specialty pharmacies.  CMS also stated that extending the current NADAC 
survey to cover specialty pharmacies, would be a significant financial burden.  Further, 
CMS responded that retail pharmacies distribute many drugs identified as specialty 
drugs, which means that specialty drugs are included on the NADAC file.  CMS also 
responded that it believes that resources should be prioritized on finalizing the 
proposed pharmacy rule that would provide States with greater clarity and additional 
options regarding value-based purchasing.   
In response to CMSs comments, we revised the recommendation text to address their 
concerns over expanding the NADAC methodology to include all specialty drugs.  
However, OIG continues to see the value in providing States with accurate acquisition 
cost data for a wider range of specialty drugs.  Providing this data to States could 
result in more accurate drug reimbursement rates and reduce the risk of paying 
inflated prices for high-cost specialty drugs.   
Please see Appendix C for the text of CMSs comments. 
   
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Recommendations | 17   
DETAILED METHODOLOGY 
 
State Survey 
In December 2018, we sent an online survey to 51 State Medicaid agencies to request 
information about how they cover outpatient specialty drugs and reimburse for them 
in their State FFS programs.  We received responses from all 51 States.  Specifically, 
we asked States:  
  whether they categorized any drugs as specialty drugs;  
  to provide the criteria that they used to categorize specialty drugs; 
  to provide the payment methodologies that they used to set reimbursement 
rates for specialty drugs;  
  to list any cost-management strategies that they implemented to control 
spending for specialty drugs; 
  to describe how they ensured that cost-management strategies did not 
inappropriately prevent beneficiaries from having access to specialty drugs; 
and 
  to describe any concerns about Medicaid coverage of and reimbursement for 
specialty drugs. 
 
In addition, we asked States whether they contract with Medicaid MCOs to provide 
prescription drug coverage to Medicaid beneficiaries, and if so, to provide information 
about how their Medicaid MCOs categorize specialty drugs.  We asked States: 
  whether Medicaid MCOs in their States categorized any drugs as specialty 
drugs; 
  to provide the criteria that Medicaid MCOs used to categorize specialty drugs;  
  whether their contracts with Medicaid MCOs included requirements on how 
Medicaid MCOs should categorize specialty drugs; 
  to describe how they reviewed or oversaw their Medicaid MCOs specialty 
drug programs;  
  to provide the payment methodologies that Medicaid MCOs used to set 
reimbursement rates;  
  to list any cost-management strategies that Medicaid MCOs implemented to 
control spending for specialty drugs; and 
  to describe the potential impact that specialty drug policies may have on 
beneficiary access, cost sharing, and capitation rates. 
 
We analyzed States responses to determine whether and how they categorized and 
identified specialty drugs in their FFS programs and Medicaid MCOs.  This included 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Detailed Methodology | 18  determining the number and percentage of State FFS programs and Medicaid MCOs 
that did and did not categorize specialty drugs or maintain specialty drug lists.  We 
also evaluated and counted the criteria States reported that their FFS programs and 
Medicaid MCOs used to categorize specialty drugs.   
We then analyzed States responses to evaluate concerns related to the coverage of 
and reimbursement for specialty drugs, as well as the methods that States used to 
conduct oversight of their Medicaid MCOs categorizations of specialty drugs.  We 
determined the extent to which States reviewed Medicaid MCOs criteria for 
categorizing specialty drugs, and the extent to which they performed any monitoring, 
reviews, or analyses of their Medicaid MCOs specialty drug lists.  
Next, we reviewed reimbursement methodologies for specialty drugs reported by 
State FFS programs and Medicaid MCOs.  For this analysis, we counted the frequency 
with which State FFS programs and/or Medicaid MCOs considered specific 
reimbursement methodologies (e.g., discounted AWP) to set reimbursement rates for 
specialty drugs.   
We then determined whether and how State FFS programs and Medicaid MCOs used 
specific cost-management strategies (e.g., prior authorization, quantity limits, 
preferred drug lists, and supplemental rebates).  Additionally, we reviewed States 
responses about managing costs for specialty drugs and how their policies might 
affect beneficiary access, cost sharing, and capitation rates.   
We requested the 11-digit NDCs and names for all drugs categorized as specialty 
drugs by State FFS programs and Medicaid MCOs, when applicable.  We also 
determined the number of NDCs categorized as specialty drugs in at least 
one Medicaid program and the number of NDCs categorized as specialty drugs by at 
least half of Medicaid programs. 
Reimbursement and Utilization Data 
We downloaded Medicaid State drug utilization data from CMSs website, which 
contains utilization and reimbursement for specialty drugs in 2018.25  This file includes 
Medicaid reimbursement amounts and utilization by NDC in each States FFS program 
and Medicaid MCOs.  We calculated total Medicaid reimbursement for any NDC that 
was categorized as a specialty drug by at least one State FFS program or 
one Medicaid MCO in 2018.  We counted the total number of Medicaid programs that 
provided NDCs that were categorized as specialty drugs, and we determined total 
2018 Medicaid reimbursement for the NDCs categorized as specialty drugs by at least 
half of these programs.  We also determined the number of NDCs categorized as 
specialty drugs without 2018 Medicaid utilization that were not listed on FDAs 
Comprehensive NDC Structured Product Labeling Data Elements file or the Medicaid 
Drug Rebate Program product file.  Additionally, we calculated the percentage of 
_____________________________________________________________________________________________________________________________ 
25 This file does not include reimbursement data that CMS suppressed.  CMS suppresses reimbursement 
and utilization data when there are 10 or fewer prescriptions dispensed for a specific NDC.   
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Detailed Methodology | 19  specialty drug spending for which Medicaid MCOs were responsible.  We then 
determined total reimbursement for the 10 drug names categorized as specialty 
drugs in at least 1 Medicaid program that had the highest Medicaid reimbursement in 
2018. 
We also calculated a State FFS program average unit reimbursement amount and a 
Medicaid MCO average unit reimbursement amount for every NDC that was 
categorized as specialty in both a States FFS program and by at least 50 percent of 
Medicaid MCOs that categorized specialty drugs within the same State.  There were 
177 NDCs that met the criteria for our analysisi.e., the NDC was categorized as a 
specialty drug by both a States FFS program and at least half of Medicaid MCOs that 
categorized specialty drugs in that same State.  We then compared the State FFS 
programs average unit reimbursement amount to the Medicaid MCOs average unit 
reimbursement amount for each drug in each State.  We determined the number and 
percentage of instances in which the State FFS program reimbursement was higher 
than Medicaid MCO reimbursement for the same drugs in 2018.   
Limitations 
We did not independently verify State-reported responses to our survey.   
State drug utilization data is aggregated by FFS and MCO reimbursement in each 
State.  Therefore, we were unable to identify the reimbursement for each MCO in a 
State.  For example, if only four out of five MCOs in a State categorized a certain drug 
as a specialty drug, we were unable to determine how much of the total MCO 
reimbursement for that drug was associated with those four MCOs.  Our Medicaid 
reimbursement totals do not reflect Medicaid drug rebates collected by States.   
This analysis does not account for any changes that a State FFS program or Medicaid 
MCO may have made to its list(s) of specialty drugs after submitting them to OIG.   
 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Detailed Methodology | 20   
APPENDIX A 
 
 
Criteria that States used to categorize specialty drugs 
This appendix includes the individual criteria used by 14 State FFS programs and 
176 Medicaid MCOs to categorize specialty drugs.26  Not all of these criteria were 
used to categorize specialty drugs in each Medicaid program; for example, some 
States considered two or more of these criteria when determining which drugs to 
categorize as specialty drugs.  This appendix also includes the number of State FFS 
programs and/or Medicaid MCOs that reported considering each criterion, as well as 
the number of States in which its FFS program or at least one of its Medicaid MCOs 
reported considering each criterion.   
In certain programs, a drug may need to meet multiple criteriasuch as requiring 
special handing, treating rare conditions, and having high costsfor a program to 
categorize it as a specialty drug.  As shown in Exhibit A-1, there also was variation 
within each of these methods of categorization.  For example, of the Medicaid 
programs that used high cost to categorize a drug as a specialty drug, the threshold 
for what was considered high cost ranged from $500 per month to $5,000 per 
month.   
Exhibit A-1: The criteria that State FFS programs and Medicaid MCOs used to 
categorize specialty drugs 
Number of FFS and MCO  Number of States in which 
#  Criterion  programs in which  criterion was applied in 
criterion was applied  either FFS or MCO 
Requires intensive monitoring, 
care management, adherence 
1  monitoring, side effect  107  32 
management and/or clinical 
oversight 
2  Requires special handling  104  31 
3  Treats a chronic condition  96  28 
4  Administered through injection  85  27 
5  Drug cost (unspecified amount)  75  28 
  (Continued on next page)     
 
_____________________________________________________________________________________________________________________________ 
26 An additional 31 Medicaid MCOs categorized drugs as specialty drugs, but they did not provide the 
criteria they used for these categorizations. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix A | 21  Exhibit A-1: The criteria that State FFS programs and Medicaid MCOs used to categorize 
specialty drugs (continued) 
Number of FFS and MCO  Number of States in which 
#  Criterion  programs in which  criterion was applied in 
criterion was applied  either FFS or MCO 
Has limited, exclusive, or 
6  68  31 
restricted distribution 
Biotechnology products, 
7  biosimilars, large molecular  68  24 
entities, or other protein entities 
8  Treats a complex condition  68  23 
Typically, not routinely stocked 
at or beyond the capabilities of 
9  community retail pharmacies;  59  25 
dispensed at a specialty 
pharmacy 
Requires member education or 
10  57  27 
training 
11  Administered through infusion  55  24 
12  Requires special storage  54  23 
Rare condition or condition 
13  treating limited/targeted  52  26 
populations 
14  Treats multiple sclerosis  37  16 
Requires complex dosing 
15  (therapies) or advanced  36  19 
treatment protocols 
16  Administered orally  36  18 
Treats hemophilia 
17  34  16 
(antihemophilic factor) 
18  Condition (unspecified)  32  16 
Treats a life-threatening 
19  32  15 
condition 
20  Treats rheumatoid arthritis  30  14 
21  Treats genetic diseases  26  15 
22  Noninjectable drugs  24  17 
Requires certifications, registries, 
23  23  18 
or additional administration 
Treats orphan or ultra-orphan 
24  23  13 
diseases 
  (Continued on next page)       
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix A | 22  Exhibit A-1: The criteria that State FFS programs and Medicaid MCOs used to categorize 
specialty drugs (continued) 
Number of FFS and MCO  Number of States in which 
#  Criterion  programs in which  criterion was applied in 
criterion was applied  either FFS or MCO 
Treats cancer (including support 
25  22  15 
agents for chemotherapy) 
26  Treats cystic fibrosis  21  7 
Certain exclusion criteria (e.g., 
27  drugs administered in inpatient  20  15 
settings) 
Determined by provider 
28  committee (e.g. Pharmacy &  19  14 
Therapeutics Committee) 
29  Requires special inventory  19  5 
Cost equal to or greater than 
30  18  14 
$670 per montha 
Identified by another party (e.g. 
31  18  10 
Pharmacy Benefits Manager) 
32  Requires special distribution  18  5 
33  Other (unspecified) issues  17  14 
34  Requires special delivery  16  13 
Administered by a healthcare 
35  16  9 
professional 
Requires risk evaluation and 
36  mitigation strategies or has a  16  9 
high risk 
Used by a small percentage of 
37  the population or has low claim  15  15 
volume 
Special Coordination or 
38  15  12 
Coordination of Care 
39  Requires special shipping  15  9 
Cost equal to or greater than 
40  14  7 
$600 per month 
Treats condition with no cure or 
41  14  2 
limited treatments 
42  Treats a progressive condition  13  1 
43  Administered through inhalation  12  8 
44  Treats hepatitis  12  8 
  (Continued on next page)     
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix A | 23  Exhibit A-1: The criteria that State FFS programs and Medicaid MCOs used to categorize 
specialty drugs (continued) 
Number of FFS and MCO  Number of States in which 
#  Criterion  programs in which  criterion was applied in 
criterion was applied  either FFS or MCO 
Method of administration 
45  11  7 
(unspecified) 
46  Associated with comorbidities  9  9 
Requires additional oversight to 
47  9  9 
limit waste 
48  Hormonal therapy  9  7 
49  Requires temperature control  8  5 
50  Treats acute diseases  7  7 
51  Treats HIV/AIDs  7  6 
52  Form (unspecified)  7  5 
Cost equal to or greater than 
53  6  6 
$1,000 per month 
Treats respiratory conditions or 
54  respiratory syncytial virus  6  5 
prevention 
Requires additional lab testing 
55  6  4 
to ensure safety 
Treats pulmonary arterial 
56  6  4 
hypertension 
Administered through 
57  6  3 
implantation 
Part of an existing specialty drug 
58  6  3 
program 
Administered through 
59  5  5 
potentially any method 
60  Is difficult to administer  5  4 
61  Treats anemia  5  4 
62  Treats osteoporosis  5  4 
63  Potential for adverse reactions  5  4 
Treats autoimmune diseases 
64  5  3 
(including TNF inhibitor) 
65  Treats Crohns disease  4  4 
66  Treats psoriasis  4  4 
67  Immunoglobulin  4  3 
  (Continued on next page)     
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix A | 24  Exhibit A-1: The criteria that State FFS programs and Medicaid MCOs used to categorize 
specialty drugs (continued) 
Number of FFS and MCO  Number of States in which 
#  Criterion  programs in which  criterion was applied in 
criterion was applied  either FFS or MCO 
68  New drug  4  3 
69  Treats eye disorders  4  3 
70  Administered through instillation  4  2 
Missing NADAC for all or 
71  majority of drugs in therapeutic  3  3 
class 
Administered during 
72  3  3 
transplantation 
Cost equal to or greater than 
73  3  3 
$10,000 per year 
Delivered via mail or mail-order 
74  3  3 
pharmacy 
Requires additional maintenance 
75  3  3 
or followup (unspecified) 
76  Type of FDA approval  3  3 
77  Administered through insertion  3  2 
78  Self-administered  3  2 
79  Treats ankylosing spondylitis  3  2 
80  Treats chronic renal failure  3  2 
Cost equal to or greater than 
81  3  1 
$3,000 per month 
82  Blood derivative products  2  2 
Cost equal to or greater than 
83  2  2 
$500 per month 
84  Hematopoietic agent  2  2 
85  Limited to a 30-day supply  2  2 
86  Member safety concerns  2  2 
87  Pharmacy type (unspecified)  2  2 
88  Population served  2  2 
89  Require special dispensing  2  2 
Require special handling or 
90  2  2 
storage (unspecified) 
91  Requires prior authorization  2  2 
  (Continued on next page)     
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix A | 25  Exhibit A-1: The criteria that State FFS programs and Medicaid MCOs used to categorize 
specialty drugs (continued) 
Number of FFS and MCO  Number of States in which 
#  Criterion  programs in which  criterion was applied in 
criterion was applied  either FFS or MCO 
92  Treats allergic asthma  2  2 
93  Treats limited conditions  2  2 
94  Treats lupus  2  2 
95  Treats metabolic disorders  2  2 
Treats primary immune 
96  2  2 
deficiency 
97  Administered topically  2  1 
98  Botulinum toxin  2  1 
99  Treats angioedema  2  1 
100  Treats cardiovascular conditions  2  1 
101  Treats enzyme deficiencies  2  1 
102  Access to care issues  1  1 
Administered during a medical 
103  1  1 
procedure 
104  Anticoagulants  1  1 
Availability of therapeutically 
105  1  1 
equivalent drugs 
106  Coagulants  1  1 
107  Compounded product  1  1 
Cost equal to or greater than 
108  1  1 
$750 per month 
Cost equal to or greater than 
109  1  1 
$1,500 per month 
Cost equal to or greater than 
110  1  1 
$5,000 per month 
Cost equal to or greater than 
111  1  1 
$35,000 per year 
Cost greater than $500 (time 
112  1  1 
period unspecified) 
113  Covered by Medicare Part B  1  1 
114  Current delivery system  1  1 
115  Drug complexity (unspecified)  1  1 
116  Hazardous material  1  1 
  (Continued on next page)     
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix A | 26  Exhibit A-1: The criteria that State FFS programs and Medicaid MCOs used to categorize 
specialty drugs (continued) 
Number of FFS and MCO  Number of States in which 
#  Criterion  programs in which  criterion was applied in 
criterion was applied  either FFS or MCO 
117  Immunology therapies  1  1 
118  Immunosuppressants  1  1 
Initiated by or in consultation 
119  1  1 
with a specialist 
Line extension of an existing 
120  1  1 
specialty product 
121  Not available through the mail  1  1 
122  Potentially any drug form  1  1 
123  Requires ancillary supplies  1  1 
124  Small molecule products  1  1 
125  Standard of Care  1  1 
126  Treats infertility  1  1 
127  Treats neurologic disorders  1  1 
128  Treats neutropenia  1  1 
129  Treats nonemergent conditions  1  1 
130  Treats osteoarthritis  1  1 
131  Treats psoriatic arthritis  1  1 
132  Treats sickle cell disease  1  1 
Source: OIG analysis of data from survey of State Medicaid programs, 2019. 
a In Medicare Part D, a drug must cost at least $670 per month to meet the criteria for inclusion on a plans specialty tier. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix A | 27   
 
APPENDIX B 
 
 
Cost-Management Strategies for Specialty Drugs 
This appendix provides information about commonly used cost-management 
strategies implemented for specialty drugs in the 38 States where the State FFS 
program and/or at least 1 Medicaid MCO categorized specialty drugs.  This appendix 
excludes 13 States because they neither categorized specialty drugs in their FFS 
programs nor contracted with at least 1 Medicaid MCO that categorized specialty 
drugs.   
Exhibit B-1: Cost-management strategies implemented for specialty drugs in States 
that categorized specialty drugs 
Maximum 
Prior  Quantity  Step   Preferred  Supplemental 
State  Allowable 
Authorization  Limits  Therapy  Drug List  Rebates 
Cost 
AZa             
           
CA 
COa             
DEa             
DCa             
GAa             
HIa             
ILa             
           
IN 
           
KS 
KYa             
 
(Continued on next page)
           
 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix B | 28  Exhibit B-1: Cost-management strategies implemented for specialty drugs in States 
t hat categorized specialty drugs (continued) 
Maximum 
Prior  Quantity  Step   Preferred  Supplemental 
State  Allowable 
Authorization  Limits  Therapy  Drug List  Rebates 
Cost 
LAa             
ME             
MD             
MAa             
           
MI 
MNa             
MS             
           
MO 
NEa             
NVa             
NHa             
NJa             
NMa             
NYa             
ND             
           
OH 
           
OK 
ORa             
PAa             
 
(Continued on next page)
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix B | 29  Exhibit B-1: Cost-management strategies implemented for specialty drugs in States 
that categorized specialty drugs (continued) 
Maximum 
Prior  Quantity  Step   Preferred  Supplemental 
State  Allowable 
Authorization  Limits  Therapy  Drug List  Rebates 
Cost 
SC             
TN             
TXa             
UTa             
           
VT 
VAa             
WAa             
           
WI 
Total  33  31  27  31  28  13 
Source: OIG analysis of data from survey of State Medicaid programs, 2019. 
a State reported that it did not know whether at least one of its Medicaid MCOs implemented at least one of these cost-management 
strategies.  Therefore, any cost-management strategies implemented by these Medicaid MCOs are not included in Exhibit B-1. 
 
 
 
 
 
 
 
 
 
 
 
 
 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix B | 30   
APPENDIX C 
 
Agency Comments 
 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix C | 31   
 
 
   
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Appendix C | 32   
ACKNOWLEDGMENTS AND CONTACT 
 
 
Acknowledgments 
Stefanie Rosen Vance served as the team leader for this study.  Others in the Office of 
Evaluation and Inspections who conducted the study include Craig Diena, Anjali 
Bushan, Karolina Hill, Thomas Jackson, and Maria Johnson.  Office of Evaluation and 
Inspections staff who provided support include Clarence Arnold, Adam Freeman, 
Kevin Manley, and Christine Moritz.  
This report was prepared under the direction of Linda Ragone, Regional Inspector 
General for Evaluation and Inspections in the Philadelphia regional office, and 
Edward K. Burley, Deputy Regional Inspector General.  
Contact 
To obtain additional information concerning this report, contact the Office of Public 
Affairs at Public.Affairs@oig.hhs.gov.  OIG reports and other information can be found 
on the OIG website at oig.hhs.gov. 
Office of Inspector General 
U.S. Department of Health and Human Services 
330 Independence Avenue, SW 
Washington, DC 20201 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  Acknowledgments and Contact | 33   
ABOUT THE OFFICE OF INSPECTOR GENERAL 
 
 
The mission of the Office of Inspector General (OIG), as mandated by Public 
Law 95-452, as amended, is to protect the integrity of the Department of Health and 
Human Services (HHS) programs, as well as the health and welfare of beneficiaries 
served by those programs.  This statutory mission is carried out through a nationwide 
network of audits, investigations, and inspections conducted by the following 
operating components: 
The Office of Audit Services (OAS) provides auditing services for HHS, 
either by conducting audits with its own audit resources or by overseeing audit work 
done by others.  Audits examine the performance of HHS programs and/or its 
grantees and contractors in carrying out their respective responsibilities and are 
intended to provide independent assessments of HHS programs and operations.  
These audits help reduce waste, abuse, and mismanagement and promote economy 
and efficiency throughout HHS. 
The Office of Evaluation and Inspections (OEI) conducts national 
evaluations to provide HHS, Congress, and the public with timely, useful, and reliable 
information on significant issues.  These evaluations focus on preventing fraud, waste, 
or abuse and promoting economy, efficiency, and effectiveness of departmental 
programs.  To promote impact, OEI reports also present practical recommendations 
for improving program operations. 
The Office of Investigations (OI) conducts criminal, civil, and administrative 
investigations of fraud and misconduct related to HHS programs, operations, and 
beneficiaries.  With investigators working in all 50 States and the District of Columbia, 
OI utilizes its resources by actively coordinating with the Department of Justice and 
other Federal, State, and local law enforcement authorities.  The investigative efforts 
of OI often lead to criminal convictions, administrative sanctions, and/or civil 
monetary penalties. 
The Office of Counsel to the Inspector General (OCIG) provides 
general legal services to OIG, rendering advice and opinions on HHS programs and 
operations and providing all legal support for OIGs internal operations.  OCIG 
represents OIG in all civil and administrative fraud and abuse cases involving HHS 
programs, including False Claims Act, program exclusion, and civil monetary penalty 
cases.  In connection with these cases, OCIG also negotiates and monitors corporate 
integrity agreements.  OCIG renders advisory opinions, issues compliance program 
guidance, publishes fraud alerts, and provides other guidance to the health care 
industry concerning the anti-kickback statute and other OIG enforcement authorities. 
States Could Do More to Oversee Spending and Contain Medicaid Costs for Specialty Drugs 
OEI-03-17-00430  About OIG | 34